IN THE HIGH COURT OF KERALA AT ERNAKULAM
ITA.No. 161 of 2009()
1. THE COMMISSIONER OF INCOME TAX,
... Petitioner
Vs
1. THE SOUTH INDIAN BANK LTD.,
... Respondent
For Petitioner :SRI.JOSE JOSEPH, SC, FOR INCOME TAX
For Respondent :SRI.P.BALAKRISHNAN (E)
The Hon'ble MR. Justice C.N.RAMACHANDRAN NAIR
The Hon'ble MR. Justice HARUN-UL-RASHID
The Hon'ble MR. Justice V.K.MOHANAN
Dated :16/12/2009
O R D E R
C.R.
C.N.RAMACHANDRAN NAIR,
HARUN-UL-RASHID &
V.K.MOHANAN, JJ.
....................................................................
I.T. Appeal Nos.161,190,299,567,809,945,1167,
1177,1183,1316,1403,1446 & 1746 of 2009
....................................................................
Dated this the 16th day of December, 2009.
JUDGMENT
Ramachandran Nair, J.
Though the issue raised in these connected appeals filed by the
Revenue stands decided in favour of the assessees by Division Bench
judgment of this court in SOUTH INDIAN BANK LTD. V.
COMMISSIONER OF INCOME-TAX reported in 262 ITR 579, the
department while arguing these appeals before a Division Bench of this
court canvassed against the correctness of the said judgment and the
Division Bench on being prima facie satisfied, referred the matter for
decision by Full Bench and hence the matter is before us.
2. When the appeals were taken up, Senior counsel Sri.Sarangan
appearing for the assessees submitted that appeal filed by the
department against the above judgment of this court is pending before
the Supreme Court and, therefore, hearing should be deferred until
ITA 161/09 & conn. cases 2
Supreme Court decides the matter. He has also relied on two decisions
of the Supreme Court in CENTRAL COALFIELDS & OTHERS V.
H.M.P. & OTHERS reported in 1994 Supp.(1) SCC 323 and in
D.K.TRIVEDI & SONS V. STATE OF GUJARAT reported in AIR
1986 SC 1323 for the proposition that in matters like this, the recourse
open to the High Court is to keep the matter pending until decision of
the Supreme Court in the pending SLP/Appeals on same issue.
However, we find that more than 40 cases are listed before us for
hearing, that too, on reference made by another Division Bench
doubting the correctness of the judgment which is under appeal before
the Supreme Court. The issue is very important and it arises on an year
to year basis in the assessment of every Bank in Kerala. Since the
department has not accepted the above Division Bench judgment which
is pending in appeal in the Supreme Court, Assessing Officers are not
following the said judgment, but are making assessments disallowing
the claim which is consistent with their stand. This leads to repetitive
ITA 161/09 & conn. cases 3
appeals for every year in the case of each Bank. The reason why
Supreme Court expects the High Court to keep matters pending in the
High Court on issues pending in SLP in the Supreme Court, is to avoid
unnecessary filing of appeals to the Supreme Court. In these cases
since the Division Bench of this court doubted the correctness of the
earlier decision of this court which is pending in Supreme Court, it is a
matter for us to consider whether the said Division Bench decision is
correct or not. If we decide the issue either way and if the parties
accept the same, then the same will put an end to all litigations in this
court and down below before the appellate authorities including the
Tribunal. Therefore, we feel the above decisions of the Supreme Court
cited by the Senior counsel appearing for the assessees do not stand in
the way of our proceeding to decide the questions referred to us by the
Division Bench. Accordingly we have heard Sri.P.K.R.Menon, Senior
Standing Counsel appearing for the appellants and Senior counsel
Sri.Sarangan and other counsel appearing for the respondent-Banks.
ITA 161/09 & conn. cases 4
3. The short question referred to us by the Division Bench is
whether by virtue of the prohibition contained in the proviso to Section
36(1)(vii) of the Income Tax Act (hereinafter referred to as “the Act”),
the respondents-Banks are entitled to deduction of bad debts written off
which is not in excess of the credit balance in the provision for bad and
doubtful debts account made under clause (viia) of Section 36(1) Act.
In other words, the controversy is only on the application of proviso to
Section 36(1)(vii) in respect of the respondents-Banks’ claim for
deduction of bad debts actually written off in the accounts. We,
therefore, make it clear that there is no controversy on respondents-
Banks’ entitlement for deduction of provision for bad and doubtful
debts which is allowed in terms of the claim made under Section 36(1)
(viia) of the Act and all what we are concerned with is whether the
disallowance made under proviso to Section 36(1)(vii) of the claim of
deduction of bad debt written off in the accounts by the respondent-
Banks on the ground that the bad debt or part thereof so written off and
ITA 161/09 & conn. cases 5
claimed by the respective assessees was not in excess of the credit
balance available in the provision for bad and doubtful debts created by
Banks covered by Section 36(1)(viia) of the Act. While the case of
the department is that ceiling contained in the proviso to Section 36(1)
(vii) applies to the bad debts claimed by all Banks to which sub-
section (viia) applies, the respondents-Banks’ case is that proviso
applies only in respect of bad debts pertaining to rural Branches and so
much so, they are entitled under Section 36(1)(vii) to claim deduction
of all other bad debts written off even if the same is not in excess of
the credit balance in the provision created for bad and doubtful debts
under clause (viia) of Section 36(1). Before proceeding to examine the
matter, we have to necessarily refer to the relevant provisions of the
Act which are extracted hereunder with the amendments made by
Finance Act, 1985 and Income Tax (Amendment) Act, 1986.
Before Amendment in 1985
“36.(1) The deductions provided for in the following
ITA 161/09 & conn. cases 6
clauses shall be allowed in respect of the matters dealt with
therein, in computing the income referred to in section 28-
………….
(vii) subject to the provisions of sub-section (2), the
amount of any debt, or part thereof, which is established to
have become a bad debt in the previous year;
(viia) in respect of any provision for bad and doubtful
debts made by a scheduled bank or a non-scheduled bank in
relation to advances made by its rural branches, an amount
not exceeding one and a half per cent of the aggregate
average advances made by such branches, computed in the
prescribed manner.”
Clause (vii) & (viia) after Amendment by Finance Act,
1985
“36(1) ……..
(vii) subject to the provisions of sub-section (2), the
amount of any debt, or part thereof, which is established to
have become a bad debt in the previous year:
Provided that in the case of a bank 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;
ITA 161/09 & conn. cases 7
(viia) in respect of any provision for bad and doubtful
debts made by a scheduled bank (not being a bank
approved by the Central Government for the purposes of
clause (viiia) or a bank incorporated by or under the laws
of a country outside India) or a non-scheduled bank, an
amount not exceeding ten per cent of the total income
(computed before making any deduction under this clause
and Chapter VI-A) or an amount not exceeding two per
cent of the aggregate average advances made by the rural
branches of such bank, computed in the prescribed manner,
whichever is higher.”
Clause (viia) after Amendment by Income Tax
(Amendment) Act, 1986
"(viia) in respect of any provision for bad and
doubtful debts made by--
(a) a scheduled bank (not being a bank approved by
the Central Government for the purposes of clause (viia) or
a bank incorporated by or under the laws of a country
outside India) or a non-scheduled bank, an amount not
exceeding five per cent of the total income (computed
before making any deduction under this clause and Chapter
VI-A) and an amount not exceeding two per cent of the
aggregate average advances made by the rural branches of
such bank computed in the prescribed manner.”
Section 36(2)(v) introduced by the Finance Act,
1985, which is relevant for the purpose of this case, reads
ITA 161/09 & conn. cases 8
as follows:
“36.(2) In making any deduction for a bad debt or
part thereof, the following provisions shall apply-
……….
……….
(v) where such debt or part of debt relates to
advances made by a bank to which clause (viia) of sub-
section (1) applies, no such deduction shall be allowed
unless the bank has debited the amount of such debt or part
of debt in that previous year to the provision for bad and
doubtful debts account made under that clause.”
4. While the Senior Standing Counsel appearing for the
department has in support of his contention relied on the reasoning in
the Reference Order of the Division Bench, the Senior counsel
appearing for the respondents-assessees has relied on the Division
Bench judgment of this court in SOUTH INDIAN BANK LTD. V.
COMMISSIONER OF INCOME-TAX (262 ITR 579), and the
judgment of the Karnataka High Court in DEPUTY COMMISSIONER
OF INCOME-TAX VS. KARNATAKA BANK LTD. (2009) 316 ITR
ITA 161/09 & conn. cases 9
345. We notice that the Karnataka High Court has decided the case
following the judgment of this court abovereferred which is pending in
appeal before the Supreme Court. Therefore, what is required to be
considered is whether the scope and meaning assigned to the
provisions by the Division Bench of this court in SOUTH INDIAN
BANK’s case is correct.
5. As already stated, the respondents-assessees were granted
deduction of provision for bad debts in terms of the claim made
subject to the ceiling provided in Section 36(1)(viia) of the Act. The
question that arises is with regard to the limitation provided under
proviso to Section 36(1)(vii) on claim of bad debt actually written off
which also respondents are entitled to claim besides the claim of
deduction of provision under Section 36(1)(viia). A Division Bench
of this court in SOUTH INDIAN BANK’s case referred above took the
view that the proviso to Section 36(1)(vii) applies only to so much of
the bad debt written off in respect of advances made by Rural Branches
ITA 161/09 & conn. cases 10
of the Bank concerned. So much so, according to the judgment,
proviso to Section 36(1)(vii) does not stand in the way of allowing
deduction of bad debt written off other than those relating to advances
made by Rural Branches, even if such bad debt or part thereof is not in
excess of the provision for bad debt created under clause (viia). The
Division Bench further held that the requirement of Section 36(2)(v)
will be satisfied for the purpose of eligibility for deduction of bad debt
actually written off, if bad debt written off relating to advances made
by Rural Branches is debited to the provision created under sub-clause
(viia), that too in respect of rural advances. This court therefore
concluded that proviso to Section 36(1)(vii) and Section 36(2)(v)
containing restrictions and limitations on deduction of bad debts
written off apply only to bad credits written off and provision for bad
debt created in respect of advances made by Rural Branches of the
Banks. However, on a close scrutiny of the proviso to Section 36(1)
(vii), we are of the view that for the application of the ceiling provided
ITA 161/09 & conn. cases 11
therein, the Legislature does not make any distinction between
provision created in respect of advances by Rural Branches and
advances made by other Branches of the Bank. In fact, what the
proviso refers is “to the Bank to which clause (viia) applies” and not to
the debt in respect of which provision is created and claimed as
deduction under clause (viia). In other words, the proviso to sub-
clause (vii) which is an exception to main clause by way of ceiling of
the eligible deduction, in the first place, applies to only such category
of Banks to which clause (viia) applies. This means that such of the
Banks which are entitled to claim deduction of provision for bad debt
in terms of clause (viia) will be covered by the proviso to clause (vii)
irrespective of the nature of advances with respect to which the bad
debt written off is claimed as deduction. In fact, it is pertinent to note
that prior to the amendment in 1985 the Banks were entitled to claim
deduction of bad written off without any ceiling whatsoever and
simultaneously they were entitled to deduction of provision covered by
ITA 161/09 & conn. cases 12
clause (viia) of Section 36(1) as well. However, when progressively
clause (viia) was liberalised providing deduction of provision created
even in respect of a percentage of income and along with it and
alternate to it percentage of advances made by rural branches,
simultaneous restrictions were introduced in regard to the Banks’
eligibility for deduction of bad debt actually written off. It is
worthwhile to note that an Explanation was added to clause (vii) of
Section 36(1)(vii) by the Finance Act, 2001 with effect from 1.4.1989
in the following lines:
“Explanation:- For the purposes of this clause, any
bad debt or part thereof written off as irrecoverable in the
accounts of the assessee shall not include any provision for
bad and doubtful debts made in the accounts of the
assessee.”
What is clear from the above is that provision for bad and doubtful
debts normally is not an allowable deduction and what is allowable
under main clause is bad debt actually written off. However, so far as
Banks to which clause (viia) applies are concerned, they are entitled to
ITA 161/09 & conn. cases 13
claim deduction of provision under sub-clause (viia), but at the same
time when bad debt written off is also claimed deduction under clause
(vii), the same will be allowed as a deduction only to the extent it is in
excess of the provision created and allowed as a deduction under
clause (viia). It is worthwhile to note that deduction under Section
36(1)(vii) is subject to sub-section (2) of Section 36 which in clause
(v) specifically states that any bad debt written off should be claimed
as a deduction only after debiting it to the provision created for bad
and doubtful debts. What is clear from the above provisions is that
though respondent-Banks are entitled to claim deduction of provision
for bad and doubtful debts in terms of clause (viia), such Banks are
entitled to deduction of bad debt actually written off only to the extent
it is in excess of the provision created and allowed as deduction under
clause (viia). Further, in order to qualify for deduction of the bad debt
written off, the requirement of Section 36(2)(v) is that such amount
should be debited to the provision created under clause (viia) of
ITA 161/09 & conn. cases 14
Section 36(1). Therefore, we are of the view that the distinction drawn
by the Division Bench in SOUTH INDIAN BANK’s case between the
bad debts written off in respect of advances made by Rural Branches
and bad debts pertaining to advances made by other Branches does not
exist and is not visualised under proviso to Section 36(1)(vii). We,
therefore, hold that the said decision of this court does not lay down
the correct interpretation of the provisions of the Act. Admittedly all
the respondent-assessees have claimed and have been allowed
deduction of provision in terms of clause (viia) of the Act. Therefore,
when they claim deduction of bad debt written off in the previous year
by virtue of the proviso to Section 36(1)(vii), they are entitled to claim
deduction of such bad debt only to the extent it exceeds the provision
created and allowed as deduction under clause (viia) of the Act.
6. In the normal course we should answer the question referred to
us by the Division Bench and send back the appeals for the Division
Bench to decide the appeals consistent with the Full Bench decision.
ITA 161/09 & conn. cases 15
However, since this is the only issue that arises in the appeals, we feel
it would be only an empty formality to send back the matter to the
Division Bench for disposal of appeals consistent with our judgment.
In order to avoid unnecessary posting of appeals before the Division
Bench, we allow the appeals by setting aside the orders of the Tribunal
and by restoring the assessments confirmed in first appeals.
C.N.RAMACHANDRAN NAIR
Judge
HARUN-UL-RASHID
Judge
V.K.MOHANAN
Judge
pms