Deduction could be allowed u/s. 36(1)(vii) (of Income Tax Act, 1961) if debt is written off in books of accounts subject to condition that same is offered as income in earlier year or incurred in ordinary course of business in case of money lender

Held Standard assets cannot be treated equally with the provision for bad and doubtful debts and the same should be held recoverable in the sense that the bank has no doubt of recoverability and the same is continued though as per the guidelines of RBI provision for standard asset is to be created as a precautionary measure, the same cannot be allowed as the deduction u/s 36(1)(viia) (of Income Tax Act, 1961). Whereas the assessee's case is that the entire amount of Rs.2,65,10,567/- including the provision against standard assets is covered u/s 36(1)(viia) (of Income Tax Act, 1961). Deduction is allowed under section36(1)(vii) (of Income Tax Act, 1961) if the debt is written off in the books of accounts subject to the condition that the same is offered as income in the earlier year or incurred in the ordinary course of business in the case of money lender. bad debt which is written off and claimed as deduction required to be offered to income when it is recovered. deduction of Provision for Bad and doubtful debts should be provided for on identification of each debt as per the conduct of the business but not lump sum deduction as argued by the assessee. For identification of Non performing assets, Bad and doubtful debts the bank has to identify each debt as per the norms prescribed by the Reserve Bank of India and classify the same as Bad and doubtful Debts. RBI further prescribes that provision on standard assets should not be reckoned for arriving at net NPAs. The Act itself has given an option to the assessee to make provision for its doubtful or loss assets (first proviso to section 36(1)(viia) (of Income Tax Act, 1961). We do agree that the bank si bound to follow the RBI guidelines. But the deduction available has to be as per the provisions of the Act only. Accordingly, we uphold the order of the CIT(A) disallowing the deduction in respect of provision made for standard assets." (Para 6)

1. These appeals are filed by the revenue against the order of the Commissioner of Income Tax (Appeals) [CIT(A)]-1, Guntur vide ITA No.106/CIT(A)-1/GNT/2013-14 and ITA No.15/CIT(A)-1/GNT/2014-15 dated 31.03.2016 for the assessment year 2010-11 and 2011-12 respectively. Cross Objections are filed by the assessee in support of the Ld.CIT(A)’s order in ITA No.106/CIT(A)-1/GNT/2013-14 and against the Ld.CIT(A)’s order in ITA No.15/CIT(A)-1/GNT/2014-15.

2. All the grounds of appeal in this case are related to the provision for bad and doubtful debts u/s 36(1)(vii)(a) (of Income Tax Act, 1961). The assessee debited a sum of Rs.2,65,10,567/- under the head ‘provision for bad and doubtful debts’ which includes provisions provided against standard assets amounting to Rs.47,93,922/-. The Assessing Officer (AO) called for explanation of the assessee as to why the provision for standard assets should not be disallowed and added back to income. The authorized representative submitted explanation stating that as per section 36(1)(viia) (of Income Tax Act, 1961), the assessee is eligible for deduction in respect of provision for bad and doubtful assets made in the books of account, an amount not exceeding 7.5% of the total income computed before any deduction under Chapter VIA of Income Tax Act or an amount of 10% of aggregate advances made by the rural branch or such bank computed in the prescribed manner. The assessee argued before the AO that the provision for standard assets also represents the provision for bad and doubtful debts and only the nomenclature is different. The entire provisions made in respect of provision for bad and doubtful debts u/s 36(1)(viia) (of Income Tax Act, 1961) is within the limit prescribed under I.T.Act, hence requested the AO to allow the same as deduction. Not being convinced with the explanation of the assessee the AO held that the provision made against the standard assets is contingent liability, cannot constitute deductible expenditure for the purpose of Income Tax Act. Provision for standard assets is not against any debt which has become doubtful. Accordingly, the AO disallowed a sum of Rs.47,93,922/- for the AY 2010-11 and Rs.69,37,085/- for the A.Y.2011-12. The AO relied on the decision in the case of Southern Technologies Ltd. Vs. JCIT(SC) 320 ITR 577 and the decision rendered by ITAT, Chennai in the case of Bhart Overseas Bank Vs. CIT (139 ITD 154) and the Instruction No.17/2008 of CBDT dated 26.11.2008. 3. Aggrieved by the order of the AO, the assessee went on appeal before the CIT(A) and furnished the computation of provision for bad and doubtful assets and the deduction entitled by the assessee as per section 36(1)(viia) (of Income Tax Act, 1961) r.w.rule 6ABA (of Income Tax Rules, 1962) which is as under :

Sl.No. Particulars Amount (Rs.)

1. Actual provision made in the books of account during the previous year relevant to the Assessment Year 2010-11 (including provision for Standard Assets amounting to Rs.47,93,922/-) 2,65,10,567 2. 7.5.% of the total income (computed before making any deduction under this clause and Chapter VIA) (i.e. 7.5% of Rs.11,79,85,971/- 88,48,947

3. 10% of the aggregate average advances made by the rural branches of such bank (Rural Advances Rs.287,23,36,000/- 28,72,33,600

4. Total of 02 & 03 rows above 29,60,82,547 5. Eligible Amount u/s 36(1)(vii)(a) (of Income Tax Act, 1961) – Lower of 01 and 04 2,65,10,567

The assessee argued that it is entitled for deduction u/s 36(1)(viia) (of Income Tax Act, 1961) on standard assets also since the entire deduction claimed was within the limit prescribed u/s 36(1)(viia) (of Income Tax Act, 1961) and relied on the decision of Hon’ble Cuttak Bench in the case of Mayurbhanj Central Cooperative Bank Limited Vs. Asst.Commissioner of Income Tax, Balasore. The Commissioner of Income Tax Appeals relied on the decision of the ITAT Amritsar Bench in the case of DCIT Vs. The Gurdaspur Central Co-op Circle, Pathankot Bank Ltd. in ITA No.99/ASR/2011 dated 07.05.2012 and the RBI guidelines and also the decision of Hon’ble ITAT ‘B’ Bench, Chennai in the case of DCIT, Circle-I, Vellore Vs. The Little Kancheepuram Cooperative Urban Bank Limited and held that the assessee is entitled for deduction on standard assets also and accordingly deleted the addition made by the AO and allowed the appeal of the assessee.

4. Aggrieved by the order of the Ld.CIT(A), the revenue is in appeal before this Tribunal. During the appeal hearing, the Ld.DR argued that the provision for standard assets does not cover u/s 36(1)(viia) (of Income Tax Act, 1961) as the same is contingent in nature. Though Reserve Bank of India (RBI) provided for standard assets in prudential norms, the same is to be considered as a precautionary measure to deal with a situation, where banks are not to suffer shock of sudden risks that could happen in future. The provision for standard assets is not against any debts which have become doubtful and are always considered in the sense that bank has no doubt of recovery. When the bank itself has treated the such assets as good and recoverable any provision made on such assets cannot be considered as a provision for bad and doubtful debts and hence not allowable as deduction u/s 36(1)(viia) (of Income Tax Act, 1961) on the standard assets, thus argued that the AO has rightly made the disallowance which required to be upheld.

5. On the other hand, Ld.AR submitted that the assessee is a bank engaged in the finance of rural advances as well as urban banking. The assessee is entitled for deduction in respect of provision for bad and doubtful debts at 7.5.% on the total income but not exceeding 10% of aggregate average advances made by the rural branches computed in the manner specified under the Rule 6ABA (of Income Tax Rules, 1962). The nomenclature is not material and it is enough if the assessee debits the expenditure in the Profit & Loss account. The only requirement is the provision should not exceed the limits prescribed u/s 36(1)(viia) (of Income Tax Act, 1961). Even Circular No.17/2008 dated 26.11.2008 supports the allowability of provision for bad and doubtful debts. Rule 6ABA (of Income Tax Rules, 1962) prescribed the manner in which aggregate advances is computed for the purpose of deduction u/s 36(1)(viia) (of Income Tax Act, 1961). Hence argued that since the overall limit does not exceed the limit prescribed under 36(1)(viia), the assessee is entitled for deduction of provision for standard assets also and accordingly argued that no interference is called for in the order of the Ld.CIT(A) and the same is to be upheld.

6. We have heard both the parties and perused the material placed on record. The assessee has debited provision for bad and doubtful debts to the extent of Rs.2,65,10,567/- in the year under consideration. The expenditure debited by the assessee includes the provision for standard assets amounting to Rs.47,93,922/- which is being added by the AO. According to the AO, the provision for standard assets cannot be treated equally with the provision for bad and doubtful debts and the same should be held recoverable in the sense that the bank has no doubt of recoverability and the same is continued though as per the guidelines of RBI provision for standard asset is to be created as a precautionary measure, the same cannot be allowed as the deduction u/s 36(1)(viia) (of Income Tax Act, 1961). Whereas the assessee’s case is that the entire amount of Rs.2,65,10,567/- including the provision against standard assets is covered u/s 36(1)(viia) (of Income Tax Act, 1961). The Ld.AR argued that the nomenclature is immaterial and as long as the assessee makes a provision within the limits prescribed u/s 36(1)(viia) (of Income Tax Act, 1961) r.w.r.6ABA (of Income Tax Rules, 1962) of I.T.Act, the assessee is entitled for deduction. Before deciding the issue it is necessary to go through section 36(1)(vii) (of Income Tax Act, 1961) and Section 36(1)(viia) (of Income Tax Act, 1961) which reads as under :

“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]:

[Provided that in the case of [an assessee] to which clause (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:]

[Provided further that where the amount of such 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 becomes irrecoverable or of an earlier previous year on the basis of income computation and disclosure standards notified under sub-section (2) of section 145 (of Income Tax Act, 1961) without recording the same in the accounts, then, such debt or part thereof shall be allowed in the previous year in which such debt or part thereof becomes irrecoverable and it shall be deemed that such debt or part thereof has been written off as irrecoverable in the accounts for the purposes of this clause.]

[Explanation 1].—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;]

[Explanation 2.—For the removal of doubts, it is hereby clarified that for the purposes of the proviso to clause (vii) of this sub-section and clause (v) of sub-section (2), the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause (viia) and such account shall relate to all types of advances, including advances made by rural branches;] a scheduled bank [not being a bank incorporated by or under the laws of a country outside India] or a non-scheduled bank [or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank], an amount [not exceeding [eight and one-half per cent]] of the total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding [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:]”

Careful reading of section 36(1) (of Income Tax Act, 1961) and (viia) shows that the word used in Sections is Bad debt and Bad and doubtful debt but not the standard asset. Both the sections are interrelated and the allowance is subject to satisfactions of the terms and conditions specified in section 36(2) (of Income Tax Act, 1961). Deduction is allowed under section36(1)(vii) (of Income Tax Act, 1961) if the debt is written off in the books of accounts subject to the condition that the same is offered as income in the earlier year or incurred in the ordinary course of business in the case of money lender. The same conditions required to be satisfied for the purpose of Bad and doubtful debts also. i.e the debt should have been incurred in the ordinary course of business and classified as doubtful debt.

The bad debt which is written off and claimed as deduction required to be offered to income when it is recovered. Similarly the provision made for bad and doubtful debt recovered subsequently required to be offered to income as and when it is recovered. Therefore the deduction of Provision for Bad and doubtful debts should be provided for on identification of each debt as per the conduct of the business but not lump sum deduction as argued by the assessee. For identification of Non performing assets, Bad and doubtful debts the bank has to identify each debt as per the norms prescribed by the Reserve Bank of India and classify the same as Bad and doubtful Debts. As per the Master circular of Prudential Norms NPAs and Bad and doubtful debts are classified as under:

“Master Circular - Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances, RBI/2014-15/74, DBOD.No.BP.BC.9/21.04.048/2014-15, July 1, 2014

2.1 Non performing Assets

2.1.1 An asset, including a leased asset, becomes non performing when it ceases to generate income for the bank.

2.1.2 A non performing asset (NPA) is a loan or an advance where; i. interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan,

ii. the account remains ‘out of order’ as indicated at paragraph 2.2 below, in respect of an Overdraft/Cash Credit (OD/CC),

iii. the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,

iv. the instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops,

v. the instalment of principal or interest thereon remains overdue for one crop season for long duration crops,

vi. the amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of guidelines on securitisation dated February 1, 2006.

vii. in respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.

4. ASSET CLASSIFICATION

4.1 Categories of NPAs Banks are required to classify nonperforming assets further into the following three categories based on the period for which the asset has remained nonperforming and the realisability of the dues:

i. Substandard Assets

ii. Doubtful Assets

iii. Loss Assets

4.1.1 Substandard Assets

With effect from March 31, 2005, a substandard asset would be one, which has remained NPA for a period less than or equal to 12 months. Such an asset will have well defined credit weaknesses that jeopardise the liquidation of the debt and are characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.

4.1.2 Doubtful Assets With effect from March 31, 2005, an asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub- standard, with the added characteristic that the weaknesses make collection or liquidation in full, – on the basis of currently known facts, conditions and values – highly questionable and improbable.

The provisioning requirements for all types of standard assets stands as below.

Banks should make general provision for standard assets at the following rates for the funded outstanding ii) Theprovisions on standard assets should not be reckoned for arriving at net NPAs.

(ii) The provisions on standard assets should not be reckoned for arriving at net NPAs.

(iii) The provisions towards Standard Assets need not be netted from gross advances but shown separately as 'Contingent Provisions against Standard Assets' under 'Other Liabilities and Provisions Others' in Schedule 5 of the balance sheet.

5.3 Doubtful assets

i.100 percent of the extent to which the advance is not covered by the realisable value of the security to which the bank has a valid recourse and the realisable value is estimated on a realistic basis.

ii.In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 25 percent to 100 percent of the secured portion depending upon the period for which the asset has remained doubtful:”

From the above norms of RBI it is clarified that the Non performing assets and the Doubtful debts constitute the debt in cases of non recoveries of principal and interest or the Interest or the principal for certain period of time. For this purpose the assessee has to identify each asset and classify the same in the correct head. Since the recovery is doubtful in the case of NPAs, Bad and doubtful debts they are identified by asset wise and are covered under section 36(1)(viia) (of Income Tax Act, 1961) and allowable as deduction. Though prudential norms of the RBI are mandatory for classification of assets and to compile the financial statements of the assessee they are guidelines for the purpose of computation of profit and loss account and balance sheets of the assessee but not binding on the income tax for computing the income. Even if the aggregate amount of Bad and doubtful debts exceed the limit, the maximum allowable deduction is limited to the amount computed in the manner prescribed under Section 36(1)(viia) (of Income Tax Act, 1961) r.w.r.6ABA (of Income Tax Rules, 1962). The provision for standard asset is purely contingent and cannot be equated with the provision for Bad and doubtful debts. For ready reference we extract the relevant part of the Master guidelines to Prudential norms which reads as under:

“5.5 Standard assets

(i) The provisioning requirements for all types of standard assets stands as below.

Banks should make general provision for standard assets at the following rates for the funded outstanding on global loan portfolio basis:

(a) direct advances to agricultural and Small and Micro Enterprises (SMEs) sectors at 0.25 per cent;

(b) advances to Commercial Real Estate (CRE) Sector at 1.00 per cent;

(d) housing loans extended at teaser rates and restructured advances as as indicated in Para 5.9.13 and 12.4 respectively; (e) all other loans and advances not included in (a) (b) and (c) above at 0.40 percent.

(ii) The provisions on standard assets should not be reckoned for arriving at netNPAs.

Prudential norms shows that it is a general provision which should not be reckoned for the purpose of reckoning the NPA, should not be netted from gross advances to be shown separately as contingent provision against standard assets. In the Income tax, the provisions are not allowable deduction and only the expenditure actually incurred or ascertained as per the system of accounting is the allowable expenditure except the provision for Bad and doubtful debts discussed above. The above classification of the provision clearly shows that it was purely general and contingent in nature.

There is no indication of non-recoverability of the debt. Therefore the provision for standard assets cannot be equated with the Provision for bad and doubtful debt and the assessee’ s argument that only the nomenclature is different is unacceptable. The provision is required only to meet the unexpected eventuality in the interest of the banking, but it is neither an allowable expenditure nor an ascertained liability. The Ld.CIT(A) relied on the decision of DCIT Vs. The Gurdaspur Central Co-op Circle, Pathankot Bank Ltd. in ITA No.99/ASR/2011 dated 07.05.2012 and in the cited case the coordinate bench of ITAT set aside the issue and remitted the matter back to the file of the AO, hence the case law relied up on the Ld.CIT(A) does not help the assessee. The assessee relied on the decision of this tribunal in Krishna District Cooperate Central Bank Ltd. in ITA No.120 and 121/Viz/2013 and the issue involved in the appeal is NPA at branch level and the expenses incurred as legal charges, notice charges etc.. of NPA advances. The ITAT held that the NPA the debt includes the expenses incurred for recovery and allowable so long as the limit is within section 36(1)(viia) (of Income Tax Act, 1961)but it does not relate to provision on standard assets. Hence the case law relied up on by the Ld.AR is distinguishable on facts and not applicable. The AO relied on the decision of ITAT,Chennai in Bharat Overseas Bank Ltd vs CIT, 139 ITD 154 where in the coordinate bench held as under:

“It is clear from the above that it is not a standard allowance which is given, but, the allowance is subject to the actual provision made by the assessee, which in no case shall exceed 7.5% of the gross total income. Therefore, the argument of the assessee that whatever the provision it had actually made in its books, a provision of 7.5% of the gross total income had to be allowed, is not in accordance with law. Now considering the second aspect, whether provision for standard assets could be considered as provision for bad and doubtful debts, admittedly a provision on standard assets is not against any debts which had become doubtful. Standard assets are always considered recoverable, in the sense, bank has no doubt of recoverability. When the bank itself has treated such assets as good and recoverable, any provision made on such assets cannot be considered as a provision for bad and doubtful debts. The debt itself being good, a provision made on good debt cannot be considered as a provision for bad and doubtful debts. May be, the RBI has made a regulation for 10% provision for standard assets also a prudential norm. This can however be considered as a measure prescribed in abundant caution, to deal with a situation where banks are not to suffer shock of sudden delinquency that could happen in future. There is always a possibility that an asset, which is fully recoverable, may not be so at future date. Nevertheless, possibility of happening of such a contingency cannot be a sufficient reason to consider a provision made on standard assets also as a provision for bad and doubtful debts.

Therefore, claim of the assessee that provision for standard assets also has to be considered for applying the condition set out under Section 36(1)(viia) (of Income Tax Act, 1961) is not in accordance with law.”

Coordinate Bench of ITAT, Hyderabad ‘A’ also expressed the similar view in the case of M/s. Andhra Pradesh Grameena Vikas Bank, Warangal Vs. ACIT, Warangal, ITA Nos. 502/H/11- Asst. year 2007- 08/967/Hyd/11- A.Year 2007-08 And ITA No. 1387/Hyd/11- A.Year.2008- 09. In instant case the ITAT held as under:

performing assets is to guard against a loss which is looming large on the bank or for the loss which has already taken place. Therefore, the RBI further prescribes that provision on standard assets should not be reckoned for arriving at net NPAs. The Act itself has given an option to the assessee to make provision for its doubtful or loss assets (first proviso to section 36(1)(viia) (of Income Tax Act, 1961). We do agree that the bank si bound to follow the RBI guidelines. But the deduction available has to be as per the provisions of the Act only. Accordingly, we uphold the order of the CIT(A) disallowing the deduction in respect of provision made for standard assets.”

7. Since the facts are identical, respectfully following the view taken by the coordinate benches supra we hold that the provision for standard assets is not an allowable deduction and we set a side the order of the Ld.CIT(A) and restore the order of the Ld.AO. The appeal of the revenue is allowed on this ground.

Cross Objection No.53/Viz/2016

8. The assessee filed Cross Objection supporting the order of the Ld.CIT(A). Since, we have allowed the appeal of the revenue cross objections filed by the assessee are dismissed. 9. Ground No.1 and 4 are general in nature which does not require specific adjudication. 10. Ground No.2 is related to the provision made against the standard assets u/s 36(1)(viia) (of Income Tax Act, 1961) under the head ‘provision for bad and doubtful debts’. The assessee made the provision for bad and doubtful debts in aggregate of Rs.6,12,89,928/- which includes provision made against standard assets amounting to Rs.69,37,085/-. This issue was discussed in the earlier order in appeal No.326/Viz/2016 for the assessment year 2010- 11 and confirmed the addition made by the AO allowed the appeal of the revenue. Accordingly we hold the issue in favour of revenue and against the assessee. Revenue’s appeal on this ground is allowed.

11. The next issue is writing back of excess provision of bad and doubtful debts against non- rural advances. The AO during the assessment proceedings disallowed a sum of Rs.9,57,70,177/- relating to the writing back of the excess provision. During the assessment proceedings, the AO asked the assessee to furnish the provisions created and allowed in respect of rural advances and non-rural advances u/s 36(1)(viia) (of Income Tax Act, 1961) in the light of Hon’ble Apex court’s decision in the case of Catholic Syrian Bank Ltd(343 ITR 270). The assessee furnished the details according to which the assessee is entitled for deduction u/s 36(1)(viia) (of Income Tax Act, 1961) on rural advances and the in respect of non- rural advances and the excess claim worked out to Rs.10,75,01,184/- as under :

Claim / Allowable Breakup Statement Year wise Financial Year

Details Claim Allowable Excess Claim

2006-07 25241116 0 25241116

2007-08 35940626 6771163 29169463

2008-09 1107481 1107481 0

2009-10 26510567 12348065 14162502

2010-11 61289928 22361825 38928103

Total Provision made

150089718 42588534 107501184

11.1. The AO applied the decision of the Hon’ble Supreme Court in the case of Catholic Syrian Bank (343 ITR 270) and held that the assessee is entitled for deduction u/s 36(1)(viia) (of Income Tax Act, 1961) only on rural advances but not on the total advances. Accordingly disallowed the sum of Rs.9,57,70,177/-.

12. Aggrieved by the order of the AO, the assessee went on appeal before the CIT(A) and the Ld.CIT(A) held that till the assessment year 2006-07, the assessee was entitled for deduction u/s 80P (of Income Tax Act, 1961) hence the assessee gets the relief of Rs.2,52,41,116/- and worked out the excess disallowance at Rs.6,37,79,159/- as under :

A.Y. Particulars Amount (Rs.)

2007-08 2,52,41,116

2008-09 2,91,69,463 2010-11 Rs.1,41,62,502 less Rs.47,93,922/- relating to provision of standard assets made during the previous year relevant to the Assessment Year 2010-11 disallowed during assessment u/s 143(3) (of Income Tax Act, 1961).

93,68,580

Total 6,37,79,159

The correctness of the above sum requires further verification at the end of the AO. The Ld.CIT(A) has adopted the incorrect figure for the assessment year 2007-08 and did not consider the excess claim for the assessment year 2009-10. The Ld.CIT(A) relied on the decision of the Hon’ble ITAT Bangalore Bench in the case of DCIT, Circle-11(4) Vs. ING Vysya Bank Limited 42 Taxman.com 303, Bangalore and allowed the appeal of the assessee. The Ld.CIT(A) directed the AO to verify the books of accounts of the assessee and if any excess provision is made for bad and doubtful debts the same is to be brought to tax.

“31. The IT (Amendment) Act, 1986 substituted the present cl. (viia) for the one as substituted by the Finance Act, 1985. These provisions came into effect from 1.4.1987.

'SECTION 36 - OTHER DEDUCTIONS

The section reads as under :

Other deductions.- (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 section 28 (of Income Tax Act, 1961) —

(viia) in respect of any provision for bad and doubtful debts made by — (a) a scheduled bank not being a bank incorporated by or under the laws of a country outside India] or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, an amount not exceeding seven and one-half per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) and an amount not exceeding ten per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner;

Provided further that for the relevant assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, the provisions of the first proviso shall have effect as if for the words "five per cent.",

the words "ten per cent." had been substituted. Provided also that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed a further deduction in excess of the limits specified in the foregoing provisions, for an amount not exceeding the income derived from redemption of securities in accordance with a scheme framed by the Central Government:

Provided also that no deduction shall be allowed under the third proviso unless such income has been disclosed in the return of income under the head "Profits and gains of business or profession".

Explanation : For the purposes of this sub-clause, "relevant assessment years" means the five consecutive assessment years commencing on or after the 1st day of April, 2000 and ending before the 1st day of April, 2005.

(b) a bank, being a bank incorporated by or under the laws of a country outside India, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A);

Provided that a public financial institution or a State financial corporation or a State industrial investment corporation referred to in this sub-clause shall, at its Moption, be allowed in any of the two consecutive assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, 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, of an amount not exceeding ten per cent. of the amount of such assets shown in the books of account of such institution or corporation, as the case may be, on the last day of the previous year.

(c) a public financial institution or a State financial corporation or a State industrial investment corporation, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A).

Explanation : For the purposes of this clause—

(i) "non-scheduled bank" means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949) which is not a scheduled bank;]

(ii) "scheduled bank" means the State Bank of India constituted under the State Bank of India Act, 1955, a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959, a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934;

(iii) "public financial institution" shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956);

(iv) "State financial corporation" means a financial corporation established under section 3 (of Income Tax Act, 1961) or section 3A (of Income Tax Act, 1961) or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951) ;

(v) "State industrial investment corporation" means a Government company within the meaning of section 617 of the Companies Act, 1956 (1 of 1956) engaged in the business of providing long-term finance for industrial projects and eligible for deduction under clause (viii) of this sub-section;

(vi) "co-operative bank", "primary agricultural credit society" and "primary co-operative agricultural and rural development bank" shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P (of Income Tax Act, 1961).'

32. The object of the substitution, as explained in para 5 of the CBDT Circular No. 464, dt. 18th July, 1986, was to give the separate deduction, viz., one in respect of rural advances and the other for provision for bad and doubtful debts in general and also to extend the benefit of deduction to all banks including foreign banks.

"Modification in respect of deduction on provision for bad and doubtful debts made by the banks.

5.1 Under the existing provisions of cl. (viia) of sub-s. (1) of s. 36 of the IT Act inserted by the Finance Act, 1979, provisions for bad and doubtful debts made by a scheduled or a non-scheduled Indian bank is allowed as deduction within prescribed limits. The limit prescribed is 10% of the total income or 2% of the aggregate average advances made by the rural branches of such banks, whichever is higher. It had been represented to the Government that the foreign banks were not entitled to any deduction under this provision and to that extent they were being discriminated against.

Further, it was felt that the existing ceiling in this regard i.e. 10% of the total income or 2% of the aggregate average advances made by the rural branches of Indian banks, whichever is higher, should be modified.

It may be clarified that foreign banks do not have rural branches and hence this amendment will not be relevant in the case of the foreign banks. The other provision secures that a further deduction shall be allowed in respect of the provision for bad and doubtful debts made by all banks not just the banks incorporated in India, limited to 5% of the total income (computed before making any deduction under this clause and Chapter VI-A). This will imply that all scheduled or non-scheduled banks having rural branches would be allowed the deduction upto 2% of the aggregate average advances made by such branches and a further deduction upto 5% of their total income in respect of provision for bad and doubtful debts."

33. To complete the sequence of amendments, we may also make a reference to the Amendment to sec.36(1)(viia) (of Income Tax Act, 1961) by the Finance Act, 2013. By the Finance Act, 2013, in section 36 (of Income Tax Act, 1961), in sub-section (1), with effect from the 1st day of April, 2014, in clause (vii), the Explanation was numbered as Explanation 1 thereof and after Explanation1 as so numbered, the following Explanation was inserted, namely:—

"Explanation 2.—For the removal of doubts, it is hereby clarified that for the purposes of the proviso to clause (vii) of this sub-section and clause (v) of sub- section (2), the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause (viia) and such account shall relate to all types of advances, including advances made by rural branches;"

34. It can be seen from the history of Sec.36(1)(viia) (of Income Tax Act, 1961) that at stage-I the deduction was allowed in respect of any provision for bad and doubtful debts made by a scheduled bank in relation to the advances made by its rural branches.

At this stage the PBDD had to be linked to the advances made by Bank's rural branches. At stage-II of Sec.36(1)(viia) (of Income Tax Act, 1961), the deduction while computing the taxable profits was allowed of an amount not exceeding ten per cent of the total income (computed before making any deduction under the proposed new provision) or two per cent of the aggregate average advances made by rural branches of such banks, whichever is higher. At this stage also the PBDD had to be created and debited to the profit and loss account but it was not required to be done in relation to advances made by Bank's rural branches and can be in relation to any debt. PBDD need not be in relation to rural advances but can be in relation to any advances both rural and non-rural advances. The two percent AAA made by rural branches of such banks had to be computed and the PBDD made in books has to be in relation to rural advances.

The other eligible sum which can be considered for deduction u/s.36(1)(viia) (of Income Tax Act, 1961) viz., ten per cent of the total income (computed before making any deduction under the proposed new provision) does not require computation in relation to rural advances.

Nevertheless the debit of PBDD to Profit and Loss account is necessary of the higher of the two sums to claim deduction u/s.36(1)(viia) (of Income Tax Act, 1961). If the concerned bank does not have rural branches then they could not claim the deduction. Therefore the deduction was confined only to banks that had rural branches.

35. At Stage-III of the provisions of Sec.36(1)(viia) (of Income Tax Act, 1961), the deduction allowed earlier was enhanced. The enhancement of the deduction was consequent to representation to the Government that the existing ceiling in this regard i.e. 10% of the total income or 2% of the aggregate average advances made by the rural branches of Indian banks, whichever is higher, should be modified.

Accordingly, by the Amending Act, the deduction presently available under cl. (viia) of sub-s. (1) of s. 36 of the IT Act has been split into two separate provisions. One of these limits the deduction to an amount not exceeding 2% (as it existed originally, now it is 10%) of the aggregate average advances made by rural branches of the banks concerned. This will imply that all scheduled or non- scheduled banks having rural branches would be allowed the deduction (a) upto 2% (now 10%) of the aggregate average advances made by such branches and (b) a further deduction upto 5% of their total income in respect of provision for bad and doubtful debts. The further deduction of 5% of total income was available to banks which did not have rural branches.

36. Therefore after 1.4.1987, scheduled or non-scheduled banks having rural branches were allowed deduction., (a) upto 2% (now 10%) of the aggregate average advances made by such branches and (b) Schedule or non-scheduled banks whether it had rural branches or not a deduction upto 5% of their total income in respect of provision for bad and doubtful debts. Even under the new provisions creating a PBDD in the books of accounts is necessary.

37. Though under Stage-II and Stage-III of the provisions of Sec.36(1)(viia) (of Income Tax Act, 1961), PBDD has to be created by debiting the profit and loss account of the sum claimed as deduction, the condition that the provision should be in respect of rural advances is not necessary. At stage-II of the provisions of Sec.36(1)(viia) (of Income Tax Act, 1961), this condition was done away with and it was only necessary to create PBDD in the books of accounts and debit to profit and loss account. The quantification of the maximum deduction permissible u/s.36(1)(viia) (of Income Tax Act, 1961) had to be done. Firstly it has to be ascertained as to what is 10% of the aggregate average advances made by rural branches, if the Bank has rural branches, otherwise that part of the deduction u/s.36(1)(viia) (of Income Tax Act, 1961) will not be available to the bank. The second part of the deduction u/s.36(1)(viia) (of Income Tax Act, 1961) has to be ascertained viz., 7.5% seven and one-half per cent of the total income (computed before making any deduction under this clause and Chapter VI-A). The above are the permissible upper limits of deductions u/s.36(1)(viia) (of Income Tax Act, 1961). The actual provision made in the books by the Assessee on account of PBDD (irrespective of whether it is rural or non-rural) has to be seen. To the extent PBDD is so created, then subject to the permissible upper limits referred to above, the deduction has to be allowed to the Assessee. The question of bifurcating the PBDD as one relating to rural advances and other advances (Non-rural advances) does not arise for consideration.”

14. In the instant case there is no dispute with regard to the creation of provision for bad and doubtful debts and no dispute with regard to the fact that the assessee bank has rural branches and given rural advances. Hence, the case law relied upon by the CIT(A) is squarely applicable to the assessee, hence, we do not see any reason to interfere with the order of the Ld.CIT(A). Accordingly we up hold the order of the Ld.CIT(A). However, there was a mistake in Ld.CIT(A) as discussed in this order earlier which needs verification. The Ld.CIT(A) has directed the AO to verify the provision made in the books of accounts and if it is found any excess provision the same should be brought to tax. Hence, we direct the AO to apply the case law cited (supra) and allow the correct deduction for the relevant assessment years and excess if any claimed by the assessee may be disallowed. Accordingly, the issue is remitted back to the file of the AO to work out the correct disallowance as per the directions given in this order.

The appeal of the assessee on this ground is allowed for statistical purpose.

Cross Objection No.54/Viz/2016

15. Ground No.1 is with regard to the provision for standard assets. Since the order of the CIT(A) is set a side the cross objection filed by the assessee is dismissed.

16. Ground Nos. 2 to 4 are related to the provisions written back in respect of non rural advances u/s 36(1)(viia) (of Income Tax Act, 1961). As per the detailed discussion made in the appeal, we have upheld the order of the Ld.CIT(A) and remitted the issue back to the file of the AO to re work the correct amount of deduction for the assessment year 2006-07 to 2010-11, hence, the Cross Objection filed by the assessee is allowed for statistical purposes.

17. In the result, the appeals of the revenue are allowed. Cross objections filed by the assessee for the assessment year 2010-11 is dismissed and for the assessment year 2011-12 is partly allowed. The above order was pronounced in the open court on 4th May, 2018.

Sd/- Sd/-

(D.S. SUNDER SINGH) (V. DURGA RAO)

ACCOUNTANT MEMBER JUDICIAL MEMBER

Visakhapatnam

Dated : 04.05.2018

LEGAL REFERENCES

Section 10 Section 6 Section 9 Section 2 Section 4 Section 11 Section 69 Section 145 Section 47 Section 36(1)(vii) Section 36(2) Section 36(1) Section 36(1)(viia) Section 287 Section 502

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There is no question

Deduction could be allowed u/s. 36(1)(vii) (of Income Tax Act, 1961) if debt is written off in books of accounts subject to condition that same is offered as income in earlier year or incurred in ordinary course of business in case of money lender

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Held

Standard assets cannot be treated equally with the provision for bad and doubtful debts and the same should be held recoverable in the sense that the bank has no doubt of recoverability and the same is
continued though as per the guidelines of RBI provision for standard asset is to be created as a precautionary measure, the same cannot be allowed as the deduction u/s 36(1)(viia) (of Income Tax Act, 1961). Whereas the assessee's case is that the entire amount of Rs.2,65,10,567/- including the provision against standard assets is covered u/s 36(1)(viia) (of Income Tax Act, 1961). Deduction is allowed under section36(1)(vii) (of Income Tax Act, 1961) if the debt is written off in the books of accounts subject to the condition that the same is offered as income in the earlier year or incurred in the ordinary course of business in the case of money lender. bad debt which is written off and claimed as deduction required to be offered to income when it is recovered. deduction of Provision for Bad and doubtful debts should be provided for on identification of each debt as per the conduct of the business but not lump sum deduction as argued by
the assessee. For identification of Non performing assets, Bad and doubtful debts the bank has to identify each debt as per the norms prescribed by the Reserve Bank of India and classify the same as
Bad and doubtful Debts. RBI further prescribes that provision on standard assets should not be reckoned for arriving at net NPAs. The Act itself has given an option to the assessee to make provision
for its doubtful or loss assets (first proviso to section 36(1)(viia) (of Income Tax Act, 1961). We do agree that the bank si bound to follow the RBI guidelines. But the deduction available has to be as per the provisions of the Act only. Accordingly, we uphold the order of the CIT(A) disallowing the deduction in respect of provision made for standard assets."

(Para 6)

1. These appeals are filed by the revenue against the order of the
Commissioner of Income Tax (Appeals) [CIT(A)]-1, Guntur vide ITA
No.106/CIT(A)-1/GNT/2013-14 and ITA No.15/CIT(A)-1/GNT/2014-15
dated 31.03.2016 for the assessment year 2010-11 and 2011-12
respectively. Cross Objections are filed by the assessee in support of the
Ld.CIT(A)’s order in ITA No.106/CIT(A)-1/GNT/2013-14 and against the
Ld.CIT(A)’s order in ITA No.15/CIT(A)-1/GNT/2014-15.

2. All the grounds of appeal in this case are related to the provision for
bad and doubtful debts u/s 36(1)(vii)(a) (of Income Tax Act, 1961). The assessee debited a
sum of Rs.2,65,10,567/- under the head ‘provision for bad and doubtful
debts’ which includes provisions provided against standard assets
amounting to Rs.47,93,922/-. The Assessing Officer (AO) called for
explanation of the assessee as to why the provision for standard assets
should not be disallowed and added back to income. The authorized
representative submitted explanation stating that as per section
36(1)(viia) (of Income Tax Act, 1961), the assessee is eligible for deduction in respect of
provision for bad and doubtful assets made in the books of account, an
amount not exceeding 7.5% of the total income computed before any
deduction under Chapter VIA of Income Tax Act or an amount of 10% of
aggregate advances made by the rural branch or such bank computed in
the prescribed manner. The assessee argued before the AO that the
provision for standard assets also represents the provision for bad and
doubtful debts and only the nomenclature is different. The entire
provisions made in respect of provision for bad and doubtful debts u/s
36(1)(viia) (of Income Tax Act, 1961) is within the limit prescribed under I.T.Act, hence requested the AO to allow the same as deduction. Not being convinced with the
explanation of the assessee the AO held that the provision made against the
standard assets is contingent liability, cannot constitute deductible
expenditure for the purpose of Income Tax Act. Provision for standard
assets is not against any debt which has become doubtful. Accordingly, the
AO disallowed a sum of Rs.47,93,922/- for the AY 2010-11 and
Rs.69,37,085/- for the A.Y.2011-12. The AO relied on the decision in the
case of Southern Technologies Ltd. Vs. JCIT(SC) 320 ITR 577 and the
decision rendered by ITAT, Chennai in the case of Bhart Overseas Bank Vs.
CIT (139 ITD 154) and the Instruction No.17/2008 of CBDT dated
26.11.2008.

3. Aggrieved by the order of the AO, the assessee went on appeal before
the CIT(A) and furnished the computation of provision for bad and doubtful
assets and the deduction entitled by the assessee as per section 36(1)(viia) (of Income Tax Act, 1961)
r.w.rule 6ABA (of Income Tax Rules, 1962) which is as under : 
Sl.No. Particulars Amount (Rs.)

1. Actual provision made in the books of account
during the previous year relevant to the Assessment
Year 2010-11 (including provision for Standard
Assets amounting to Rs.47,93,922/-) 2,65,10,567
2. 7.5.% of the total income (computed before making
any deduction under this clause and Chapter VIA)
(i.e. 7.5% of Rs.11,79,85,971/- 88,48,947

3. 10% of the aggregate average advances made by the
rural branches of such bank
(Rural Advances Rs.287,23,36,000/- 28,72,33,600

4. Total of 02 &amp; 03 rows above 29,60,82,547
5. Eligible Amount u/s 36(1)(vii)(a) (of Income Tax Act, 1961) – Lower of 01 and
04 2,65,10,567

The assessee argued that it is entitled for deduction u/s 36(1)(viia) (of Income Tax Act, 1961) on
standard assets also since the entire deduction claimed was within the limit
prescribed u/s 36(1)(viia) (of Income Tax Act, 1961) and relied on the decision of Hon’ble Cuttak
Bench in the case of Mayurbhanj Central Cooperative Bank Limited Vs.
Asst.Commissioner of Income Tax, Balasore. The Commissioner of Income
Tax Appeals relied on the decision of the ITAT Amritsar Bench in the case
of DCIT Vs. The Gurdaspur Central Co-op Circle, Pathankot Bank Ltd. in ITA
No.99/ASR/2011 dated 07.05.2012 and the RBI guidelines and also the
decision of Hon’ble ITAT ‘B’ Bench, Chennai in the case of DCIT, Circle-I,
Vellore Vs. The Little Kancheepuram Cooperative Urban Bank Limited and
held that the assessee is entitled for deduction on standard assets also and
accordingly deleted the addition made by the AO and allowed the appeal of
the assessee.

4. Aggrieved by the order of the Ld.CIT(A), the revenue is in appeal
before this Tribunal. During the appeal hearing, the Ld.DR argued that the
provision for standard assets does not cover u/s 36(1)(viia) (of Income Tax Act, 1961) as the same is
contingent in nature. Though Reserve Bank of India (RBI) provided for
standard assets in prudential norms, the same is to be considered as a
precautionary measure to deal with a situation, where banks are not to
suffer shock of sudden risks that could happen in future. The provision for
standard assets is not against any debts which have become doubtful and
are always considered in the sense that bank has no doubt of recovery.
When the bank itself has treated the such assets as good and recoverable
any provision made on such assets cannot be considered as a provision for
bad and doubtful debts and hence not allowable as deduction u/s
36(1)(viia) (of Income Tax Act, 1961) on the standard assets, thus argued that the AO has rightly
made the disallowance which required to be upheld.

5. On the other hand, Ld.AR submitted that the assessee is a bank
engaged in the finance of rural advances as well as urban banking. The
assessee is entitled for deduction in respect of provision for bad and
doubtful debts at 7.5.% on the total income but not exceeding 10% of
aggregate average advances made by the rural branches computed in the
manner specified under the Rule 6ABA (of Income Tax Rules, 1962). The
nomenclature is not material and it is enough if the assessee debits the
expenditure in the Profit &amp; Loss account. The only requirement is the
provision should not exceed the limits prescribed u/s 36(1)(viia) (of Income Tax Act, 1961). Even
Circular No.17/2008 dated 26.11.2008 supports the allowability of
provision for bad and doubtful debts. Rule 6ABA (of Income Tax Rules, 1962) prescribed the manner in
which aggregate advances is computed for the purpose of deduction u/s
36(1)(viia) (of Income Tax Act, 1961). Hence argued that since the overall limit does not
exceed the limit prescribed under 36(1)(viia), the assessee is entitled for
deduction of provision for standard assets also and accordingly argued that
no interference is called for in the order of the Ld.CIT(A) and the same is to be upheld.

6. We have heard both the parties and perused the material placed on
record. The assessee has debited provision for bad and doubtful debts to
the extent of Rs.2,65,10,567/- in the year under consideration. The
expenditure debited by the assessee includes the provision for standard
assets amounting to Rs.47,93,922/- which is being added by the AO.
According to the AO, the provision for standard assets cannot be treated
equally with the provision for bad and doubtful debts and the same should
be held recoverable in the sense that the bank has no doubt of
recoverability and the same is continued though as per the guidelines of
RBI provision for standard asset is to be created as a precautionary
measure, the same cannot be allowed as the deduction u/s 36(1)(viia) (of Income Tax Act, 1961). Whereas the assessee’s case is that the entire amount of
Rs.2,65,10,567/- including the provision against standard assets is covered
u/s 36(1)(viia) (of Income Tax Act, 1961). The Ld.AR argued that the nomenclature is
immaterial and as long as the assessee makes a provision within the limits
prescribed u/s 36(1)(viia) (of Income Tax Act, 1961) r.w.r.6ABA (of Income Tax Rules, 1962) of I.T.Act, the assessee is entitled for deduction. Before deciding the issue it is necessary to go through section 36(1)(vii) (of Income Tax Act, 1961) and Section 36(1)(viia) (of Income Tax Act, 1961) which reads as under : 
“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]: 
[Provided that in the case of [an assessee] to which clause (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:] 
[Provided further that where the amount of such 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 becomes
irrecoverable or of an earlier previous year on the basis of income
computation and disclosure standards notified under sub-section (2)
of section 145 (of Income Tax Act, 1961) without recording the same in the accounts, then, such debt
or part thereof shall be allowed in the previous year in which such debt or
part thereof becomes irrecoverable and it shall be deemed that such debt or
part thereof has been written off as irrecoverable in the accounts for the
purposes of this clause.] 
[Explanation 1].—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;] 
[Explanation 2.—For the removal of doubts, it is hereby clarified that for
the purposes of the proviso to clause (vii) of this sub-section and clause (v) of sub-section (2), the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause (viia) and such account shall relate to all types of advances, including advances made by rural branches;] a scheduled bank [not being a bank incorporated by or under the laws of a country outside India] or a non-scheduled bank [or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank], an amount [not exceeding [eight and one-half per cent]] of the total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding [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:]” 
Careful reading of section 36(1) (of Income Tax Act, 1961) and (viia) shows that the word used
in Sections is Bad debt and Bad and doubtful debt but not the standard
asset. Both the sections are interrelated and the allowance is subject to
satisfactions of the terms and conditions specified in section 36(2) (of Income Tax Act, 1961). Deduction is allowed under section36(1)(vii) (of Income Tax Act, 1961) if the debt is written off in the books of accounts subject to the condition that the same is offered as income in the earlier year or incurred in the ordinary course of business in the case of money lender. The same conditions required to be satisfied for the purpose of Bad and doubtful debts also. i.e the debt should have been incurred in the ordinary course of business and classified as doubtful debt. 
The bad debt which is written off and claimed as deduction required to be
offered to income when it is recovered. Similarly the provision made for
bad and doubtful debt recovered subsequently required to be offered to
income as and when it is recovered. Therefore the deduction of Provision
for Bad and doubtful debts should be provided for on identification of each
debt as per the conduct of the business but not lump sum deduction as
argued by the assessee. For identification of Non performing assets, Bad
and doubtful debts the bank has to identify each debt as per the norms
prescribed by the Reserve Bank of India and classify the same as Bad and
doubtful Debts. As per the Master circular of Prudential Norms NPAs and
Bad and doubtful debts are classified as under: 
“Master Circular - Prudential norms on Income Recognition, Asset
Classification and Provisioning pertaining to Advances, RBI/2014-15/74,
DBOD.No.BP.BC.9/21.04.048/2014-15, July 1, 2014 
2.1 Non performing Assets 
2.1.1 An asset, including a leased asset, becomes non performing when it ceases to generate income for the bank. 
2.1.2 A non performing asset (NPA) is a loan or an advance where;
i. interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan, 
ii. the account remains ‘out of order’ as indicated at paragraph 2.2 below, in respect of an Overdraft/Cash Credit (OD/CC), 
iii. the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, 
iv. the instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops, 
v. the instalment of principal or interest thereon remains overdue for one crop season for long duration crops, 
vi. the amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of guidelines on securitisation dated February 1, 2006. 
vii. in respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment. 
4. ASSET CLASSIFICATION 
4.1 Categories of NPAs Banks are required to classify nonperforming assets further into the following three categories based on the period for which the asset has remained nonperforming and the realisability of the dues: 
i. Substandard Assets 
ii. Doubtful Assets 
iii. Loss Assets 
4.1.1 Substandard Assets 
With effect from March 31, 2005, a substandard asset would be one, which has
remained NPA for a period less than or equal to 12 months. Such an asset will have well defined credit weaknesses that jeopardise the liquidation of the debt and are characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. 
4.1.2 Doubtful Assets With effect from March 31, 2005, an asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub- standard, with the added characteristic that the weaknesses make collection or liquidation in full, – on the basis of currently known facts, conditions and values – highly questionable and improbable. 
The provisioning requirements for all types of standard assets stands as below. 
Banks should make general provision for standard assets at the following rates for the funded outstanding ii) Theprovisions on standard assets should not be reckoned for arriving at net NPAs. 
(ii) The provisions on standard assets should not be reckoned for arriving at net NPAs. 
(iii) The provisions towards Standard Assets need not be netted from gross advances but shown separately as 'Contingent Provisions against Standard Assets' under 'Other Liabilities and Provisions Others' in Schedule 5 of the balance sheet. 
5.3 Doubtful assets 
i.100 percent of the extent to which the advance is not covered by the realisable value of the security to which the bank has a valid recourse and the realisable value is estimated on a realistic basis. 
ii.In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 25 percent to 100 percent of the secured portion depending upon the period for which the asset has remained doubtful:” 
From the above norms of RBI it is clarified that the Non performing
assets and the Doubtful debts constitute the debt in cases of non recoveries
of principal and interest or the Interest or the principal for certain period of time. For this purpose the assessee has to identify each asset and classify the same in the correct head. Since the recovery is doubtful in the case of NPAs, Bad and doubtful debts they are identified by asset wise and are covered under section 36(1)(viia) (of Income Tax Act, 1961) and allowable as deduction. Though
prudential norms of the RBI are mandatory for classification of assets and
to compile the financial statements of the assessee they are guidelines for
the purpose of computation of profit and loss account and balance sheets of
the assessee but not binding on the income tax for computing the income.
Even if the aggregate amount of Bad and doubtful debts exceed the limit,
the maximum allowable deduction is limited to the amount computed in
the manner prescribed under Section 36(1)(viia) (of Income Tax Act, 1961) r.w.r.6ABA (of Income Tax Rules, 1962). The provision
for standard asset is purely contingent and cannot be equated with the
provision for Bad and doubtful debts. For ready reference we extract the
relevant part of the Master guidelines to Prudential norms which reads as
under:

“5.5 Standard assets 
(i) The provisioning requirements for all types of standard assets stands as below. 
Banks should make general provision for standard assets at the following rates for the funded outstanding on global loan portfolio basis: 
(a) direct advances to agricultural and Small and Micro Enterprises (SMEs) sectors at 0.25 per cent; 
(b) advances to Commercial Real Estate (CRE) Sector at 1.00 per cent; 
(c) advances to Commercial Real Estate – Residential Housing Sector (CRE - RH) at 0.75 per cent1 
(d) housing loans extended at teaser rates and restructured advances as as indicated in Para 5.9.13 and 12.4 respectively;

(e) all other loans and advances not included in (a) (b) and (c) above at 0.40 percent. 
(ii) The provisions on standard assets should not be reckoned for arriving at netNPAs. 
(iii) The provisions towards Standard Assets need not be netted from gross advances but shown separately as 'Contingent Provisions against Standard Assets' under 'Other Liabilities and Provisions Others' in Schedule 5 of the balance sheet.” 
Prudential norms shows that it is a general provision which should
not be reckoned for the purpose of reckoning the NPA, should not be netted
from gross advances to be shown separately as contingent provision
against standard assets. In the Income tax, the provisions are not allowable
deduction and only the expenditure actually incurred or ascertained as per
the system of accounting is the allowable expenditure except the provision
for Bad and doubtful debts discussed above. The above classification of the
provision clearly shows that it was purely general and contingent in nature. 
There is no indication of non-recoverability of the debt. Therefore the
provision for standard assets cannot be equated with the Provision for bad
and doubtful debt and the assessee’ s argument that only the nomenclature
is different is unacceptable. The provision is required only to meet the
unexpected eventuality in the interest of the banking, but it is neither an
allowable expenditure nor an ascertained liability. The Ld.CIT(A) relied on
the decision of DCIT Vs. The Gurdaspur Central Co-op Circle, Pathankot
Bank Ltd. in ITA No.99/ASR/2011 dated 07.05.2012 and in the cited case
the coordinate bench of ITAT set aside the issue and remitted the matter
back to the file of the AO, hence the case law relied up on the Ld.CIT(A)
does not help the assessee. The assessee relied on the decision of this
tribunal in Krishna District Cooperate Central Bank Ltd. in ITA No.120 and
121/Viz/2013 and the issue involved in the appeal is NPA at branch level
and the expenses incurred as legal charges, notice charges etc.. of NPA
advances. The ITAT held that the NPA the debt includes the expenses
incurred for recovery and allowable so long as the limit is within section
36(1)(viia) (of Income Tax Act, 1961)but it does not relate to provision on standard assets. Hence the
case law relied up on by the Ld.AR is distinguishable on facts and not
applicable. The AO relied on the decision of ITAT,Chennai in Bharat
Overseas Bank Ltd vs CIT, 139 ITD 154 where in the coordinate bench held
as under: 
“It is clear from the above that it is not a standard allowance which is given, but, the allowance is subject to the actual provision made by the assessee, which in no case shall exceed 7.5% of the gross total income. Therefore, the argument of the assessee that whatever the provision it had actually made in its books, a provision of 7.5% of the gross total income had to be allowed, is not in accordance with law. Now considering the second aspect, whether provision for standard assets could be considered as provision for bad and doubtful debts, admittedly a provision on standard assets is not against any debts which had become doubtful. Standard assets are always considered recoverable, in the sense, bank has no doubt of recoverability. When the bank itself has treated such assets as good and recoverable, any provision made on such assets cannot be considered as a provision for bad and doubtful debts. The debt itself being good, a provision made on good debt cannot be considered as a provision for
bad and doubtful debts. May be, the RBI has made a regulation for 10%
provision for standard assets also a prudential norm. This can however be
considered as a measure prescribed in abundant caution, to deal with a
situation where banks are not to suffer shock of sudden delinquency that could happen in future. There is always a possibility that an asset, which is fully recoverable, may not be so at future date. Nevertheless, possibility of happening of such a contingency cannot be a sufficient reason to consider a provision made on standard assets also as a provision for bad and doubtful debts. 
Therefore, claim of the assessee that provision for standard assets also has to be considered for applying the condition set out under Section 36(1)(viia) (of Income Tax Act, 1961) is not in accordance with law.” 
Coordinate Bench of ITAT, Hyderabad ‘A’ also expressed the
similar view in the case of M/s. Andhra Pradesh Grameena Vikas Bank,
Warangal Vs. ACIT, Warangal, ITA Nos. 502/H/11- Asst. year 2007-
08/967/Hyd/11- A.Year 2007-08 And ITA No. 1387/Hyd/11- A.Year.2008-
09. In instant case the ITAT held as under:

“Again, according to RBI, a sub-standard asset is one which has remained NPA
for a period of at least 18 months. In such cases, the current net worth of the borrower or the current market value of the security is not enough to ensure recovery of the dues in full. Doubtful asset is one which has remained NPA for a period of exceeding 18 months. It has all weaknesses inherent in assets that were classified as sub- standard, with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable. A loss asset is one where loss has been identified which has not been written off fully. Such an asset is considered as uncollectible and of such little value that its continuance as a bankable asset is not warranted. As against these, standard assets are performing assets. In other words, they are neither bad nor doubtful of recovery. Non-performing assets have well defined creditworthiness that jeopardize the liquidation of the debt and there is distinct possibility that the bank will sustain loss if deficiencies are not corrected. On the other hand, performing assets are such which have not ceased to generate income for the bank. Nonetheless, as a matter of prudence, the RBI has directed
the banks to make a general provision of a minimum of 0.25% on standard
assets w.e.f. the year ending 31-3-2000. This is only, in our opinion, a safety measure or an over-cautious approach to take care of a standard asset
becoming non-standard in future. But certainly, the provision for standard
asset cannot be equated with a provision for a bad and doubtful debt. That is why, it is prescribed by the RBI that the provision for standard assets need not be netted out from gross advances but should be shown separately as
"contingent Provisions against Standard Assets". The head itself is indicative of the fact that this provision is contingent in nature whereas the provision for non A.P. Grameena Vikas Bank, Warangal. 
performing assets is to guard against a loss which is looming large on the bank or for the loss which has already taken place. Therefore, the RBI further prescribes that provision on standard assets should not be reckoned for arriving at net NPAs. The Act itself has given an option to the assessee to make provision for its doubtful or loss assets (first proviso to section 36(1)(viia) (of Income Tax Act, 1961). We do agree that the bank si bound to follow the RBI guidelines. But the deduction available has to be as per the provisions of the Act only. Accordingly, we uphold the order of the CIT(A) disallowing the deduction in respect of provision made for standard assets.” 
7. Since the facts are identical, respectfully following the view taken by
the coordinate benches supra we hold that the provision for standard
assets is not an allowable deduction and we set a side the order of the
Ld.CIT(A) and restore the order of the Ld.AO. The appeal of the revenue is
allowed on this ground.

Cross Objection No.53/Viz/2016 
8. The assessee filed Cross Objection supporting the order of the
Ld.CIT(A). Since, we have allowed the appeal of the revenue cross
objections filed by the assessee are dismissed.

9. Ground No.1 and 4 are general in nature which does not require
specific adjudication.

10. Ground No.2 is related to the provision made against the standard
assets u/s 36(1)(viia) (of Income Tax Act, 1961) under the head ‘provision for bad and doubtful
debts’. The assessee made the provision for bad and doubtful debts in
aggregate of Rs.6,12,89,928/- which includes provision made against
standard assets amounting to Rs.69,37,085/-. This issue was discussed in
the earlier order in appeal No.326/Viz/2016 for the assessment year 2010-
11 and confirmed the addition made by the AO allowed the appeal of the
revenue. Accordingly we hold the issue in favour of revenue and against the
assessee. Revenue’s appeal on this ground is allowed.

11. The next issue is writing back of excess provision of bad and doubtful
debts against non- rural advances. The AO during the assessment
proceedings disallowed a sum of Rs.9,57,70,177/- relating to the writing
back of the excess provision. During the assessment proceedings, the AO
asked the assessee to furnish the provisions created and allowed in respect
of rural advances and non-rural advances u/s 36(1)(viia) (of Income Tax Act, 1961) in the light of
Hon’ble Apex court’s decision in the case of Catholic Syrian Bank Ltd(343
ITR 270). The assessee furnished the details according to which the
assessee is entitled for deduction u/s 36(1)(viia) (of Income Tax Act, 1961) on rural advances and
the in respect of non- rural advances and the excess claim worked out to
Rs.10,75,01,184/- as under :

Claim / Allowable Breakup Statement Year wise
Financial Year

Details Claim Allowable Excess Claim 
2006-07 25241116 0 25241116 
2007-08 35940626 6771163 29169463 
2008-09 1107481 1107481 0 
2009-10 26510567 12348065 14162502 
2010-11 61289928 22361825 38928103

Total Provision made

150089718 42588534 107501184

11.1. The AO applied the decision of the Hon’ble Supreme Court in the case
of Catholic Syrian Bank (343 ITR 270) and held that the assessee is entitled
for deduction u/s 36(1)(viia) (of Income Tax Act, 1961) only on rural advances but not on the total
advances. Accordingly disallowed the sum of Rs.9,57,70,177/-.

12. Aggrieved by the order of the AO, the assessee went on appeal before
the CIT(A) and the Ld.CIT(A) held that till the assessment year 2006-07, the
assessee was entitled for deduction u/s 80P (of Income Tax Act, 1961) hence the assessee gets the
relief of Rs.2,52,41,116/- and worked out the excess disallowance at
Rs.6,37,79,159/- as under : 
A.Y. Particulars Amount (Rs.) 
2007-08 2,52,41,116 
2008-09 2,91,69,463

2010-11 Rs.1,41,62,502 less Rs.47,93,922/- relating to
provision of standard assets made during the
previous year relevant to the Assessment Year
2010-11 disallowed during assessment u/s
143(3) (of Income Tax Act, 1961).

93,68,580

Total 6,37,79,159

The correctness of the above sum requires further verification at the
end of the AO. The Ld.CIT(A) has adopted the incorrect figure for the
assessment year 2007-08 and did not consider the excess claim for the
assessment year 2009-10. The Ld.CIT(A) relied on the decision of the
Hon’ble ITAT Bangalore Bench in the case of DCIT, Circle-11(4) Vs. ING
Vysya Bank Limited 42 Taxman.com 303, Bangalore and allowed the appeal
of the assessee. The Ld.CIT(A) directed the AO to verify the books of
accounts of the assessee and if any excess provision is made for bad and
doubtful debts the same is to be brought to tax.

13. We have heard both the parties and perused the material placed on
record. The assessing officer allowed the provision made on Rural
advances excluding the provision for standard assets. The AO restricted the
net provision for Bad and Doubtful debts to the extent of provision made
on rural advances. The AO is of the view that the assessee is entitled for
deduction u/s 36(1)(viia) (of Income Tax Act, 1961) only on rural advances and worked out the
excess claim under provision for bad and doubtful debts to the extent of
Rs.9,57,70,177/- relating to the assessment year 2007-08 to 2011-12 and
the same was added back to the total income. The assessee’s case is that
the assessee is entitled for provision for bad and doubtful debts not only on Rural debts but also on non-rural advances. He argued that the deduction
claimed is within the limit of section 36(a)(viia) (of Income Tax Act, 1961) and the same is allowable
as deduction. The Coordinate Bench of ITAT Bangalore in the case of DCIT,
Circle-11(4) Vs.ING Vysya Bank Limited (supra) held that what is to be
seen by the AO is whether the provision for bad and doubtful debts is
created, whether it is in respect of rural or non-rural advances by debiting
profit and loss account and to the extent provision for doubtful debts so
created, the assessee is entitled for deduction subject to the upper limit of deduction laid down in the said section. Hon’ble ITAT while delivering the decision considered the decision of Hon’ble Supreme Court in the case of
Catholic Syrian Bank (343 ITR 270)also. For ready reference, we extract the
relevant paragraph of the order of the ITAT in the case of ING Vysya Bank
Ltd. Supra which reads as under : 
“31. The IT (Amendment) Act, 1986 substituted the present cl. (viia) for the one as substituted by the Finance Act, 1985. These provisions came into effect from 1.4.1987. 
'SECTION 36 - OTHER DEDUCTIONS 
The section reads as under : 
Other deductions.- (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 section 28 (of Income Tax Act, 1961) — 
(viia) in respect of any provision for bad and doubtful debts made by —
(a) a scheduled bank not being a bank incorporated by or under the laws of a
country outside India] or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, an amount not exceeding seven and one-half per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) and an amount not exceeding 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. 
Provided further that for the relevant assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, the provisions of the first proviso shall have effect as if for the words "five per cent.", 
the words "ten per cent." had been substituted. Provided also that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed a further deduction in excess of the limits specified in the foregoing provisions, for an amount not exceeding the
income derived from redemption of securities in accordance with a scheme
framed by the Central Government: 
Provided also that no deduction shall be allowed under the third proviso unless such income has been disclosed in the return of income under the head "Profits and gains of business or profession". 
Explanation : For the purposes of this sub-clause, "relevant assessment years" means the five consecutive assessment years commencing on or after the 1st day of April, 2000 and ending before the 1st day of April, 2005. 
(b) a bank, being a bank incorporated by or under the laws of a country outside India, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A); 
Provided that a public financial institution or a State financial corporation or a State industrial investment corporation referred to in this sub-clause shall, at its Moption, be allowed in any of the two consecutive assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, 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, of an amount not exceeding ten per cent. of the amount of such assets shown in the books of account of such institution or
corporation, as the case may be, on the last day of the previous year. 
(c) a public financial institution or a State financial corporation or a State industrial investment corporation, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A). 
Explanation : For the purposes of this clause—

(i) "non-scheduled bank" means a banking company as defined in
clause (c) of section 5 of the Banking Regulation Act, 1949 (10
of 1949) which is not a scheduled bank;]

(ia) "rural branch" means a branch of a scheduled bank or a non-
scheduled bank situated in a place which has a population of
not more than ten thousand according to the last preceding
census of which the relevant figures have been published
before the first day of the previous year; 
(ii) "scheduled bank" means the State Bank of India constituted
under the State Bank of India Act, 1955, a subsidiary bank as
defined in the State Bank of India (Subsidiary Banks) Act,
1959, a corresponding new bank constituted under section 3 of
the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1970, or under section 3 of the Banking
Companies (Acquisition and Transfer of Undertakings) Act,
1980, or any other bank being a bank included in the Second
Schedule to the Reserve Bank of India Act, 1934; 
(iii) "public financial institution" shall have the meaning assigned
to it in section 4A of the Companies Act, 1956 (1 of 1956); 
(iv) "State financial corporation" means a financial corporation
established under section 3 (of Income Tax Act, 1961) or section 3A (of Income Tax Act, 1961) or an institution
notified under section 46 of the State Financial Corporations
Act, 1951 (63 of 1951) ; 
(v) "State industrial investment corporation" means a Government
company within the meaning of section 617 of the Companies
Act, 1956 (1 of 1956) engaged in the business of providing
long-term finance for industrial projects and eligible for
deduction under clause (viii) of this sub-section; 
(vi) "co-operative bank", "primary agricultural credit society" and
"primary co-operative agricultural and rural development
bank" shall have the meanings respectively assigned to them in
the Explanation to sub-section (4) of section 80P (of Income Tax Act, 1961).' 
32. The object of the substitution, as explained in para 5 of the CBDT Circular No. 464, dt. 18th July, 1986, was to give the separate deduction, viz., one in respect of rural advances and the other for provision for bad and doubtful debts in general and also to extend the benefit of deduction to all banks including foreign banks. 
"Modification in respect of deduction on provision for bad and doubtful debts made by the banks. 
5.1 Under the existing provisions of cl. (viia) of sub-s. (1) of s. 36 of the IT Act inserted by the Finance Act, 1979, provisions for bad and doubtful debts made by a scheduled or a non-scheduled Indian bank is allowed as deduction within prescribed limits. The limit prescribed is 10% of the total income or 2% of the aggregate average advances made by the rural branches of such banks, whichever is higher. It had been represented to the Government that the foreign banks were not entitled to any deduction under this provision and to that extent they were being discriminated against. Further, it was felt that the existing ceiling in this regard i.e. 10% of the total income or 2% of the aggregate average advances made by the rural branches of Indian banks, whichever is higher, should be modified. Accordingly, by the Amending Act, the deduction presently available
under cl. (viia) of sub-s. (1) of s. 36 of the IT Act has been split into two separate provisions. One of these limits the deduction to an amount not exceeding 2% of the aggregate average advances made by rural branches of the banks concerned. 
It may be clarified that foreign banks do not have rural branches and hence this amendment will not be relevant in the case of the foreign banks. The other provision secures that a further deduction shall be allowed in respect of the provision for bad and doubtful debts made by all banks not just the banks incorporated in India, limited to 5% of the total income (computed before making any deduction under this clause and Chapter VI-A). This will imply that all scheduled or non-scheduled banks having rural branches would be allowed the deduction upto 2% of the aggregate average advances made by such branches and a further deduction upto 5% of their total income in respect of provision for bad and doubtful debts." 
33. To complete the sequence of amendments, we may also make a reference to
the Amendment to sec.36(1)(viia) (of Income Tax Act, 1961) by the Finance Act, 2013. By the
Finance Act, 2013, in section 36 (of Income Tax Act, 1961), in sub-section (1), with effect from the 1st day of April, 2014, in clause (vii), the Explanation was numbered as Explanation 1 thereof and after Explanation1 as so numbered, the following Explanation was inserted, namely:— 
"Explanation 2.—For the removal of doubts, it is hereby clarified that for the purposes of the proviso to clause (vii) of this sub-section and clause (v) of sub- section (2), the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause (viia) and such account shall relate to all types of advances, including advances made by rural branches;" 
34. It can be seen from the history of Sec.36(1)(viia) (of Income Tax Act, 1961) that at stage-I the deduction was allowed in respect of any provision for bad and doubtful debts made by a scheduled bank in relation to the advances made by its rural branches. 
At this stage the PBDD had to be linked to the advances made by Bank's rural
branches. At stage-II of Sec.36(1)(viia) (of Income Tax Act, 1961), the deduction while computing the
taxable profits was allowed of an amount not exceeding ten per cent of the total income (computed before making any deduction under the proposed new
provision) or two per cent of the aggregate average advances made by rural
branches of such banks, whichever is higher. At this stage also the PBDD had to be created and debited to the profit and loss account but it was not required to be done in relation to advances made by Bank's rural branches and can be in relation to any debt. PBDD need not be in relation to rural advances but can be in relation to any advances both rural and non-rural advances. The two percent AAA made by rural branches of such banks had to be computed and the PBDD made in books has to be in relation to rural advances. The other eligible sum which can be considered for deduction u/s.36(1)(viia) (of Income Tax Act, 1961) viz., ten per cent of the total income (computed before making any deduction under the proposed new provision) does not require computation in relation to rural advances. 
Nevertheless the debit of PBDD to Profit and Loss account is necessary of the higher of the two sums to claim deduction u/s.36(1)(viia) (of Income Tax Act, 1961). If the concerned bank does not have rural branches then they could not claim the deduction. Therefore the deduction was confined only to banks that had rural branches. 
35. At Stage-III of the provisions of Sec.36(1)(viia) (of Income Tax Act, 1961), the deduction allowed earlier was enhanced. The enhancement of the deduction was consequent to representation to the Government that the existing ceiling in this regard i.e. 10% of the total income or 2% of the aggregate average advances made by the rural branches of Indian banks, whichever is higher, should be modified. 
Accordingly, by the Amending Act, the deduction presently available under cl. (viia) of sub-s. (1) of s. 36 of the IT Act has been split into two separate provisions. One of these limits the deduction to an amount not exceeding 2% (as it existed originally, now it is 10%) of the aggregate average advances made by rural branches of the banks concerned. This will imply that all scheduled or non- scheduled banks having rural branches would be allowed the deduction (a) upto 2% (now 10%) of the aggregate average advances made by such branches and (b) a further deduction upto 5% of their total income in respect of provision for bad and doubtful debts. The further deduction of 5% of total income was available to banks which did not have rural branches. 
36. Therefore after 1.4.1987, scheduled or non-scheduled banks having rural
branches were allowed deduction., (a) upto 2% (now 10%) of the aggregate
average advances made by such branches and (b) Schedule or non-scheduled
banks whether it had rural branches or not a deduction upto 5% of their total income in respect of provision for bad and doubtful debts. Even under the new provisions creating a PBDD in the books of accounts is necessary. 
37. Though under Stage-II and Stage-III of the provisions of Sec.36(1)(viia) (of Income Tax Act, 1961), PBDD has to be created by debiting the profit and loss account of the sum claimed as deduction, the condition that the provision should be in respect of rural advances is not necessary. At stage-II of the provisions of Sec.36(1)(viia) (of Income Tax Act, 1961), this condition was done away with and it was only necessary to create PBDD in the books of accounts and debit to profit and loss account. The quantification of the maximum deduction permissible u/s.36(1)(viia) (of Income Tax Act, 1961) had to be done. Firstly it has to be ascertained as to what is 10% of the aggregate average advances made by rural branches, if the Bank has rural branches, otherwise that part of the deduction u/s.36(1)(viia) (of Income Tax Act, 1961) will not be available to the bank. The second part of the deduction u/s.36(1)(viia) (of Income Tax Act, 1961) has to be ascertained viz., 7.5% seven and one-half per cent of the total income (computed before making any deduction under this clause and Chapter VI-A). The above are the
permissible upper limits of deductions u/s.36(1)(viia) (of Income Tax Act, 1961). The actual provision made in the books by the Assessee on account of PBDD (irrespective of whether it is rural or non-rural) has to be seen. To the extent PBDD is so created, then subject to the permissible upper limits referred to above, the deduction has to be allowed to the Assessee. The question of bifurcating the PBDD as one relating to rural advances and other advances (Non-rural advances) does not arise for consideration.”

14. In the instant case there is no dispute with regard to the creation of
provision for bad and doubtful debts and no dispute with regard to the fact
that the assessee bank has rural branches and given rural advances. Hence,
the case law relied upon by the CIT(A) is squarely applicable to the
assessee, hence, we do not see any reason to interfere with the order of the
Ld.CIT(A). Accordingly we up hold the order of the Ld.CIT(A). However,
there was a mistake in Ld.CIT(A) as discussed in this order earlier which
needs verification. The Ld.CIT(A) has directed the AO to verify the
provision made in the books of accounts and if it is found any excess
provision the same should be brought to tax. Hence, we direct the AO to
apply the case law cited (supra) and allow the correct deduction for the
relevant assessment years and excess if any claimed by the assessee may be
disallowed. Accordingly, the issue is remitted back to the file of the AO to
work out the correct disallowance as per the directions given in this order. 
The appeal of the assessee on this ground is allowed for statistical purpose.

Cross Objection No.54/Viz/2016 
15. Ground No.1 is with regard to the provision for standard assets. Since
the order of the CIT(A) is set a side the cross objection filed by the assessee is dismissed.

16. Ground Nos. 2 to 4 are related to the provisions written back in
respect of non rural advances u/s 36(1)(viia) (of Income Tax Act, 1961). As per the detailed
discussion made in the appeal, we have upheld the order of the Ld.CIT(A)
and remitted the issue back to the file of the AO to re work the correct
amount of deduction for the assessment year 2006-07 to 2010-11, hence,
the Cross Objection filed by the assessee is allowed for statistical purposes.

17. In the result, the appeals of the revenue are allowed. Cross
objections filed by the assessee for the assessment year 2010-11 is
dismissed and for the assessment year 2011-12 is partly allowed.

The above order was pronounced in the open court on 4th May, 2018.

Sd/- Sd/-

(D.S. SUNDER SINGH) (V. DURGA RAO) 
ACCOUNTANT MEMBER JUDICIAL MEMBER Visakhapatnam 
Dated : 04.05.2018

2. All the grounds of appeal in this case are related to the provision for
bad and doubtful debts u/s 36(1)(vii)(a) (of Income Tax Act, 1961). The assessee debited a
sum of Rs.2,65,10,567/- under the head ‘provision for bad and doubtful
debts’ which includes provisions provided against standard assets
amounting to Rs.47,93,922/-. The Assessing Officer (AO) called for
explanation of the assessee as to why the provision for standard assets
should not be disallowed and added back to income. The authorized
representative submitted explanation stating that as per section
36(1)(viia) (of Income Tax Act, 1961), the assessee is eligible for deduction in respect of
provision for bad and doubtful assets made in the books of account, an
amount not exceeding 7.5% of the total income computed before any
deduction under Chapter VIA of Income Tax Act or an amount of 10% of
aggregate advances made by the rural branch or such bank computed in
the prescribed manner. The assessee argued before the AO that the
provision for standard assets also represents the provision for bad and
doubtful debts and only the nomenclature is different. The entire
provisions made in respect of provision for bad and doubtful debts u/s
36(1)(viia) (of Income Tax Act, 1961) is within the limit prescribed under I.T.Act, hence requested the AO to allow the same as deduction. Not being convinced with the
explanation of the assessee the AO held that the provision made against the
standard assets is contingent liability, cannot constitute deductible
expenditure for the purpose of Income Tax Act. Provision for standard
assets is not against any debt which has become doubtful. Accordingly, the
AO disallowed a sum of Rs.47,93,922/- for the AY 2010-11 and
Rs.69,37,085/- for the A.Y.2011-12. The AO relied on the decision in the
case of Southern Technologies Ltd. Vs. JCIT(SC) 320 ITR 577 and the
decision rendered by ITAT, Chennai in the case of Bhart Overseas Bank Vs.
CIT (139 ITD 154) and the Instruction No.17/2008 of CBDT dated
26.11.2008.

1. Actual provision made in the books of account
during the previous year relevant to the Assessment
Year 2010-11 (including provision for Standard
Assets amounting to Rs.47,93,922/-) 2,65,10,567
2. 7.5.% of the total income (computed before making
any deduction under this clause and Chapter VIA)
(i.e. 7.5% of Rs.11,79,85,971/- 88,48,947

3. 10% of the aggregate average advances made by the
rural branches of such bank
(Rural Advances Rs.287,23,36,000/- 28,72,33,600

4. Total of 02 & 03 rows above 29,60,82,547
5. Eligible Amount u/s 36(1)(vii)(a) (of Income Tax Act, 1961) – Lower of 01 and
04 2,65,10,567

The assessee argued that it is entitled for deduction u/s 36(1)(viia) (of Income Tax Act, 1961) on
standard assets also since the entire deduction claimed was within the limit
prescribed u/s 36(1)(viia) (of Income Tax Act, 1961) and relied on the decision of Hon’ble Cuttak
Bench in the case of Mayurbhanj Central Cooperative Bank Limited Vs.
Asst.Commissioner of Income Tax, Balasore. The Commissioner of Income
Tax Appeals relied on the decision of the ITAT Amritsar Bench in the case
of DCIT Vs. The Gurdaspur Central Co-op Circle, Pathankot Bank Ltd. in ITA
No.99/ASR/2011 dated 07.05.2012 and the RBI guidelines and also the
decision of Hon’ble ITAT ‘B’ Bench, Chennai in the case of DCIT, Circle-I,
Vellore Vs. The Little Kancheepuram Cooperative Urban Bank Limited and
held that the assessee is entitled for deduction on standard assets also and
accordingly deleted the addition made by the AO and allowed the appeal of
the assessee.

4. Aggrieved by the order of the Ld.CIT(A), the revenue is in appeal
before this Tribunal. During the appeal hearing, the Ld.DR argued that the
provision for standard assets does not cover u/s 36(1)(viia) (of Income Tax Act, 1961) as the same is
contingent in nature. Though Reserve Bank of India (RBI) provided for
standard assets in prudential norms, the same is to be considered as a
precautionary measure to deal with a situation, where banks are not to
suffer shock of sudden risks that could happen in future. The provision for
standard assets is not against any debts which have become doubtful and
are always considered in the sense that bank has no doubt of recovery.
When the bank itself has treated the such assets as good and recoverable
any provision made on such assets cannot be considered as a provision for
bad and doubtful debts and hence not allowable as deduction u/s
36(1)(viia) (of Income Tax Act, 1961) on the standard assets, thus argued that the AO has rightly
made the disallowance which required to be upheld.

5. On the other hand, Ld.AR submitted that the assessee is a bank
engaged in the finance of rural advances as well as urban banking. The
assessee is entitled for deduction in respect of provision for bad and
doubtful debts at 7.5.% on the total income but not exceeding 10% of
aggregate average advances made by the rural branches computed in the
manner specified under the Rule 6ABA (of Income Tax Rules, 1962). The
nomenclature is not material and it is enough if the assessee debits the
expenditure in the Profit & Loss account. The only requirement is the
provision should not exceed the limits prescribed u/s 36(1)(viia) (of Income Tax Act, 1961). Even
Circular No.17/2008 dated 26.11.2008 supports the allowability of
provision for bad and doubtful debts. Rule 6ABA (of Income Tax Rules, 1962) prescribed the manner in
which aggregate advances is computed for the purpose of deduction u/s
36(1)(viia) (of Income Tax Act, 1961). Hence argued that since the overall limit does not
exceed the limit prescribed under 36(1)(viia), the assessee is entitled for
deduction of provision for standard assets also and accordingly argued that
no interference is called for in the order of the Ld.CIT(A) and the same is to be upheld.

9. Ground No.1 and 4 are general in nature which does not require
specific adjudication.

11. The next issue is writing back of excess provision of bad and doubtful
debts against non- rural advances. The AO during the assessment
proceedings disallowed a sum of Rs.9,57,70,177/- relating to the writing
back of the excess provision. During the assessment proceedings, the AO
asked the assessee to furnish the provisions created and allowed in respect
of rural advances and non-rural advances u/s 36(1)(viia) (of Income Tax Act, 1961) in the light of
Hon’ble Apex court’s decision in the case of Catholic Syrian Bank Ltd(343
ITR 270). The assessee furnished the details according to which the
assessee is entitled for deduction u/s 36(1)(viia) (of Income Tax Act, 1961) on rural advances and
the in respect of non- rural advances and the excess claim worked out to
Rs.10,75,01,184/- as under :

Claim / Allowable Breakup Statement Year wise
Financial Year

Total Provision made

150089718 42588534 107501184

11.1. The AO applied the decision of the Hon’ble Supreme Court in the case
of Catholic Syrian Bank (343 ITR 270) and held that the assessee is entitled
for deduction u/s 36(1)(viia) (of Income Tax Act, 1961) only on rural advances but not on the total
advances. Accordingly disallowed the sum of Rs.9,57,70,177/-.

12. Aggrieved by the order of the AO, the assessee went on appeal before
the CIT(A) and the Ld.CIT(A) held that till the assessment year 2006-07, the
assessee was entitled for deduction u/s 80P (of Income Tax Act, 1961) hence the assessee gets the
relief of Rs.2,52,41,116/- and worked out the excess disallowance at
Rs.6,37,79,159/- as under : 
A.Y. Particulars Amount (Rs.) 
2007-08 2,52,41,116 
2008-09 2,91,69,463

93,68,580

Total 6,37,79,159

The correctness of the above sum requires further verification at the
end of the AO. The Ld.CIT(A) has adopted the incorrect figure for the
assessment year 2007-08 and did not consider the excess claim for the
assessment year 2009-10. The Ld.CIT(A) relied on the decision of the
Hon’ble ITAT Bangalore Bench in the case of DCIT, Circle-11(4) Vs. ING
Vysya Bank Limited 42 Taxman.com 303, Bangalore and allowed the appeal
of the assessee. The Ld.CIT(A) directed the AO to verify the books of
accounts of the assessee and if any excess provision is made for bad and
doubtful debts the same is to be brought to tax.

(i) "non-scheduled bank" means a banking company as defined in
clause (c) of section 5 of the Banking Regulation Act, 1949 (10
of 1949) which is not a scheduled bank;]

14. In the instant case there is no dispute with regard to the creation of
provision for bad and doubtful debts and no dispute with regard to the fact
that the assessee bank has rural branches and given rural advances. Hence,
the case law relied upon by the CIT(A) is squarely applicable to the
assessee, hence, we do not see any reason to interfere with the order of the
Ld.CIT(A). Accordingly we up hold the order of the Ld.CIT(A). However,
there was a mistake in Ld.CIT(A) as discussed in this order earlier which
needs verification. The Ld.CIT(A) has directed the AO to verify the
provision made in the books of accounts and if it is found any excess
provision the same should be brought to tax. Hence, we direct the AO to
apply the case law cited (supra) and allow the correct deduction for the
relevant assessment years and excess if any claimed by the assessee may be
disallowed. Accordingly, the issue is remitted back to the file of the AO to
work out the correct disallowance as per the directions given in this order. 
The appeal of the assessee on this ground is allowed for statistical purpose.

16. Ground Nos. 2 to 4 are related to the provisions written back in
respect of non rural advances u/s 36(1)(viia) (of Income Tax Act, 1961). As per the detailed
discussion made in the appeal, we have upheld the order of the Ld.CIT(A)
and remitted the issue back to the file of the AO to re work the correct
amount of deduction for the assessment year 2006-07 to 2010-11, hence,
the Cross Objection filed by the assessee is allowed for statistical purposes.

17. In the result, the appeals of the revenue are allowed. Cross
objections filed by the assessee for the assessment year 2010-11 is
dismissed and for the assessment year 2011-12 is partly allowed.

The above order was pronounced in the open court on 4th May, 2018.

Sd/- Sd/-

(D.S. SUNDER SINGH) (V. DURGA RAO) 
ACCOUNTANT MEMBER JUDICIAL MEMBER Visakhapatnam 
Dated : 04.05.2018

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Deduction could be allowed u/s. 36(1)(vii) (of Income Tax Act, 1961) if debt is written off in books of accounts subject to condition that same is offered as income in earlier year or incurred in ordinary course of business in case of money lender