×Latest Case Laws on Income Tax by various Income Tax Appellate Tribunals in India
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03-01-2019, Ratnagiri Dist. Central, Section 36(i)(vii), 147, Tribunal Pune
Asstt. Year - 2004-05, 2006-07, 2007-08, 2008-09 & to 2010-11
PER : R.S.SYAL, VP
This bunch of five appeals by the assessee, pertaining to the assessment years 2004-05, 2006-07, 2007-08, 2008-09 and 2010- 11, involve some common issues. We are, therefore, proceeding to dispose them off by this consolidated order for the sake of convenience.
2. These appeals came up for hearing before the Tribunal on 19-12-2018. The assessee moved an application seeking adjournment. The request of the assessee was accepted and the case was adjourned for today with clear direction that “no further adjournment will be given to the assessee”. Neither anyone has appeared on behalf of the assessee today, nor any application for adjournment has been moved. Under these circumstances, we are proceeding to dispose of the appeals ex parte qua the assessee. A.Y. 2004-05 :
3. The first issue raised in this appeal is against the initiation of re-assessment proceedings.
4. Briefly stated, the facts of the case are that the original assessment in this case was completed u/s 143(3) of the Incometax Act, 1961 (hereinafter also called `the Act’) on 28-12-2006, wherein the loss returned by the assessee at Rs.10.53 crore was accepted. Notice u/s.148 dated 28-03-2011 was issued giving the following reasons, as reproduced from the assessment order :
"The assessment under section 143(3) was completed in this case on 28/12/2006 wherein the loss returned by the assessee at Rs.10,53,92,979/- is accepted.
The assessee is a co-operative bank. It is noticed that, the assessee has made provision of Rs.5,22,09,000/- on account of N.P.A., Rs.13,23,80,669/- on account of overdue interest, and Rs.24,95,800/- on account of loss on gout. securities in its profit and loss account. These provisions are not allowable as per Income Tax Act, 1961. However, no disallowance is made in the regular assessment on these accounts.
During the course of assessment proceedings for A.Y. 2005-2006, 2006-2007 and 2007-2008 the assessee bank taken a stand that these provisions are mandatory for the bank as per guidelines by the RBI and NABARD. The guidelines regarding the provisioning for debts and non performing assets have been made as measure of prudence. By provisioning in such manner, the bank is cushioned from unnecessary shock if certain debts turn bad. The guidelines in
this regard which had been made by the RBI re binding or mandatory on the banks which are supervised by the RBI. The provisions of the Income Tax Act supercede all other laws in Income Tax proceedings. A guideline framed by RBI has to be applied only to the extent permitted by the Act. The Act provides for allowance of deduction on account of bad debts. Before allowing the deduction, the assessee has to prove that debts have actually turned bad.
The bank has to make provision for doubtful assets, non performing assets and loss assets. These three categories are separated by the period for which particular loan has been serviced. If the instalment on a loan has not been received for a specified number of quarters, it is considered as-non performing asset. If the loan has not been serviced for a longer period i is categorized as loss asset and so on.
The category of loss asset is the only category which falls into the definition of bad debts' and described in section 36(i)(vii) of the Act. The other categories for which provisioning is done i.e..doubtful assets and non performing assets have not yet gone bad. However, since there is a possibility that the debt can go bad, the guidelines allow the bank to appropriate part of its profit by making a provision against such assets which will be utilized in case the debt turns bad.
The provisioning however is not of 100% of the debts but fraction of the debts. This is evidence that the debt is not yet a bad debt. The provision made out of prudence for assets other than loss assets or assets which are due to be written off therefore cannot be allowed.
The deduction under Income Tax Act is allowable only on account ofbad debts written off in the books.
The provisions of section 36(1)(viia) were also not applicable to the assessee during A.Y. 2004-2005 wherein it could claim the bad debts on percentage basis being a Co-operative Bank.
As regards provision for loss on Govt. Securities, it is to be realized at the time of its maturity or actual sale, thus, it cannot be said to be an investment of permanent nature. The profit or loss can be arrived only at the time of maturity or sale of the security. As such, the debit of loss in the middle, without actual sale or maturity, without any transfer, cannot be allowed. Being permanent investments, the securities have to be stilted at the purchase price, unlike trading
assets or stock for which the bank can adopt the method of accounting based on cost or market value. Being a permanent investment, and not a trading asset, the provision made for loss in value of securities by marking securities to the market price as on the last day of the financial year is not an allowable deduction. The