G. Sivarajan, J.:— The first four appeals are filed by the Dhanalakshmi Bank Ltd. in respect of the assessment years 1986-87, 1987-88, 1988-89 and 1992-93. The next seven appeals are filed by the South Indian Bank Ltd. in respect of the assessment years 1987-88 to 1992-93 and the remaining seven appeals are filed by the Nedi ngadi Bank Ltd. in respect of the assessment years 1985-86 to 1991-92. The appellants are all scheduled banks which are assessees under the Income-tax Act, 1961 (for short “the Act”).

2. The sole question arising for consideration in all these appeals is regarding the scope and ambit of the proviso to clause (vii) of sub-section (1) of section 36 of the Act. Since the aforesaid question is a purely legal issue, it is not necessary to state the factual situation of each of these appeals. Suffice it to say that the appellants in all these appeals are scheduled banks and that the appellants in their assessments under the Act for the concerned assessment years had claimed deductions both under the provisions of section 36(1)(vii) and under the provisions of section 36(1)(viia) of the Act. There is no dispute with regard to the computation of the benefit available under clause (viia) of sub-section (1) of section 36 of the Act. However, the dispute is only with regard to the computation of the benefit available under clause (vii) of the said sub-section. As already noted, the scope of the proviso to clause (vii) of section 36(1) of the Act is the issue involved in these appeals. It is therefore necessary to refer to the relevant provisions of section 36 of the Act. Here, it must be noted that section 36(1)(vii) in terms refers to the provisions of section 36(2) and also section 36(1)(vii i) of the Act. It is also necessary to note that the proviso to clause (vii) of section 36(1) and clause (v) of section 36(2) were inserted simultaneously with effect from April 1, 1985, by the Finance Act, 1985. Clause (viia) of section 36(1) of the Act, it must be noted, was inserted by Act 21 of 1979 with effect from April 1, 1980, and first substituted by Act 32 of 1985 with effect from April 1, 1985, and later by Act 26 of 1986 with effect from April 1, 1987. There were certain other changes also which are not relevant for these appeals and hence those details are not given. In the circumstances, it will be advantageous to refer to the provisions of clauses (vii) and (viia) as they stood prior to their amendment by the Finance Act, 1985, as also the said provisions as they stood after the amendment of 1985. Section 36(1)(vii) and (viia) as it stood prior to the amendments made by the Finance Act, 1985, reads as follows:

“36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in 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.”

3. Section 36(1)(vii) and (viia) as it stood after the amendment made by the Finance Act, 1985, reads as follows:

“36(1). The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in 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:

Provided that in the case of 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;

(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.”

4. Clause (viia) had again undergone a change, by the Income-tax (Amendment) Act, 1986, from April 1, 1987, the relevant portion of which reads as follows:

“(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.”

5. There is a further amendment to the main part of clause (via) by Act 4 of 1988 with effect from April 1, 1989. Clause (vii) main part reads as follows:

“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.”

6. Section 36(2) specifies certain conditions to be fulfilled for eligibility to the claims under section 36(1). Section 36(2)(v) introduced by the Finance Act, 1985, which is relevant for the purpose of this case, reads as follows:

“36. (2) In making any deduction for a bad debt or part thereof, the following provisions shall ap nly—…

(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.”

7. Section 36(1)(vii) of the Act as it stood prior to its amendment in 1985 provides for a deduction in the computation of taxable profits the amount of any debt or part thereof which is established to have become a bad debt in the previous year. This is subject to the: fulfilment of the conditions specified in subsection (2) of section 36. However, as per the amendment made by the Finance Act, 1985, a proviso was added to clause (vii) as per which, in the case of a bank to which clause (viia) applies, the amount of 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 debt accounts made under clause (viia). The provision, thus requires the debiting of the amount of bad and doubtful debts to the provisions for bad and doubtful debts account. Clause (viia) which was inserted with effect from April 1, 1980, by the Finance Act, 1979, provided for a deduction in respect of any provision for bad and doubtful debts made by a scheduled bank in relation to advances made by its rural branches of an amount not exceeding one and a half per cent, of the aggregate average advances made by such branches. This provision, it must be noted, was made to promote rural banking and assist the scheduled banks in making adequate provisions from their current income to provide for the risks in relation to the rural advances. However, by the amendment of clause (viia) with effect from April 1, 1985, the quantum of deduction and the method of computation was changed. Earlier, as already noted, the deduction was in relation to the advances made by the rural branches of the banks. Now, after the 1985 amendment, the deduction was geared to a percentage of the total income computed before making any deduction under this clause or Chapter VI-A or an amount not exceeding two per cent, of the aggregate average advances made by the rural branches of such banks computed in the prescribed manner whichever is higher. The amendment of clause (viia) made with effect from April 1, 1987, gave a twofold deduction (1) an amount not exceeding five per cent, of the total income, and (2) an amount not exceeding two per cent, of the aggregate average advances made by the rural branches, computed in the prescribed manner. Thus, it is evident from clause (viia) both before and after the amendments made in 1985 and 1987 provision for bad and doubtful debts in relation to rural advances made by the bank was given a special benefit. The deduction allowable under clause (vii) is subject to the provisions of section 36(2). Clause (v) of sub-section (2), as already noted, was introduced with effect from April 1, 1985. Under that clause, where such debt or part of debt relates to advances made by an assessee 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 debt account made under that clause. We have already referred to the relevant provisions of section 36(1) and (2) of the Act so far as the deduction of bad debt is concerned. Under clause (vii) of section 36(1) prior to its amendment in 1985, i.e, up to April 1, 1985, deduction of the entire amount of debt or part thereof which is established to have become a bad debt in the previous year was provided. During that period, the benefit under clause (viia) was also available to a scheduled bank only in relation to advances made by its rural branches to a certain percentage of the aggregate average advances made by such branches computed in the prescribed manner. Thus, so far as the deduction under clause (vii) was concerned, the assessee had only to establish that the debt with respect to which deduction is claimed, has become bad in the previous year, of course, subject to the four conditions specified in section 36(2) of the Act. There was no complication at all. However, after the amendment to the provisions of clause (vii) by adding the proviso, and by adding clause (v) to section 36(2), the deduction available under clause (vii) was limited to the extent provided in the proviso to the said clause and subject to fulfilment of the condition specified in clause (v) of section 36(2). So, from the assessment year 1985-86 onwards, in order to get the deduction provided under clause (vii), the assessee had to satisfy all the conditions imposed in section 36(2). Clauses (i) to (iv) of section 36(2) are applicable to all persons who are claiming the deduction under clause (vii). But, clause (v) of section 36(2) is peculiar to scheduled banks alone. In other words, clause (v) is a special provision applicable to scheduled banks. It obliged a scheduled bank which is claiming the benefit of clause (vii) of section 36(1) to debit such debt or part thereof relating to advances made by a bank to which clause (viia) of sub-section (1) applies and unless the bank has debited the provision of such debt or part thereof of the previous year in the provisions for bad and doubtful debt account under clause (viia), the deduction will not be available. This provision was required for the application of the proviso introduced simultaneously in clause (vii) of section 36(1). This is for the reason that by virtue of the proviso to clause (vii), the deduction under clause (vii) is 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. By the combined operation of the provisions of clause (v) of section 36(2) and the proviso to section 36(1)(vii), the deduction available under clause (vii) will be the difference between the bad debt written off by the assessee-bank in its book and the provision made for such bad debt under clause (viia) of section 35(1). In other words, the assessee-bank will be entitled to the deduction of the entire bad debt relating to advances made by the urban branches written off in the books and also the difference between the amount written off in the Dooks relating to advances made by the rural branches during the previous year relevant to the assessment year and the credit balance in the provision for bad and doubtful debts account relating to advances made by the rural branches made under clause (viia).

8. The contention of the assessee is that the debt to be debited in the provision for bad and doubtful debts account under clause (viia) is only the bad debt with reference to which the provision is made under clause (viia). In other words, the contention of the assessee is that in case the assessee had made provision under clause (viia) in respect of bad debt relating to the urban advances also, what clause (v) 3f section 36(2) provides is to debit that part of bad debt written off in the books relating to advances made by the rural branches in respect of which the provision is made under clause (viia). That is to the effect that if the bad debt which is written off in the books relates to urban advances as well as rural advances and if the provision is made both in respect of urban advances and in respect of rural advances, the obligation under clause (v) of section 36(2) is to debit that part of the bad debt written off relating to the rural advances only in the provision for bad and doubtful debts account made under clause (viia), and that in respect of other bad debts written off, the entire amount is entitled to deduction under clause (vii). On the other hand, the contention of the Revenue is that irrespective of whether the provision is made under clause (viia) in respect of all the bad debts, the assessee is entitled to the deduction under clause (vii) only the difference between the bad debt written off and the provision made under clause (viia) without any distinction of either urban advances or rural advances.

9. We have heard Sri P. Balachandran and Sri P. Balakrishnan, learned counsel appearing for the assessees and Sri P.K.R Menon, senior Central Government standing counsel appealing for the respondents. All of them have put forward their respective contentions with reference to the provisions which we have already extracted and with reference to the Statement of Objects and Reasons for the introduction of clause (viia) as well as the proviso to clause (vii) of section 36(1). According to us, the scope of the proviso to clause (vii) of section 36(1) has to be ascertained from a cumulative reading of the provisions of clauses (vii), (viia) of section 36(1) and clause (v) of section 36(2) of the Act. It would appear to us that the object of introducing the proviso was to avoid a double benefit to the scheduled banks. We have already noted that prior to the amendment of the relevant provisions with effect from April 1, 1985, a scheduled bank was entitled to a special treatment in respect of bad debts incurred on account of advances made by rural branches. By virtue of clauses (vii) and (viia), a scheduled bank was getting full deduction of the entire bad debt claim provided it is established to have become bad and an additional benefit in respect of such debt or part thereof relating to the advances made by the rural branches by way of provision made under clause (viia). The Legislature, it appears, thought that such double benefits in respect of rural advances should not be allowed and, therefore, they have inserted a proviso to clause (vii) and simultaneously inserted clause (v) of section 36(2). There is no dispute that a scheduled bank which makes a provision in respect of bad debts, be it in respect of urban advances or in respect of rural advances, is entitled to the benefit of deduction under clause (viia) of section 36(1) after April 1, 1985. Similarly, all assessees who are engaged in money lending business, who are not covered by clause (viia) are entitled to deduction of the entire bad debt established as such up to April 1, 1987, and thereafter the entire bad debt written off in the books of account under clause (vii). There is no question of application of the proviso to clause (vii) in such cases. What is required is only the satisfaction of the four conditions specified in section 36(2) of the Act. When it comes to the claim for deduction under clause (vii) by a scheduled bank, the proviso operates and says that 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 clause (viia). If the scheduled bank makes a provision under clause (viia) in respect of the bad debts (in relation to urban or rural), clause (v) of section 36(2) obliges the scheduled bank to debit that part of the debt written of in the accounts made under clause (viia) as otherwise it cannot claim or avail of deduction under clause (vii). If the bad debt written off is debited as provided under section 36(2), in the provision for bad and doubtful debts account made under clause (viia), then, under the proviso to clause (vii), the amount of the deduction or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance. In this context, it is relevant to closely examine the provisions of the main part of clause (vii) which provides that subject to the provisions of sub-section (2), the amount of any debt or part thereof is entitled to deduction. clause (v) of section 36(2) also refers to such debt or part of debt,-which must be understood as debt referred to in the main part of clause (vii) and it would appear that if the bad debt referred to in the main part of clause (vii) takes in both urban and rural advances, then the obligation under clause (v) is only to debit that part of debt which relates to the rural advances. If the obligation under clause (v) is only to that extent, if we read the proviso, the position is very clear that the amount of deduction relating to any such debt or part thereof used in the proviso must necessarily relate to the amount required to be debited under cause (v) of section 36(2) which we have already pointed out, is the debt with reference to which the provision is made under clause (viia). In other words, as already pointed out, a scheduled bank may be having both urban and rural branches and advances are given from both branches. Having regard to the hazards involved in realising the advances made by rural branches particularly to agriculturists, certainly the assessee-bank will prefer to make provision for bad debt in respect of advances made in the rural branches. If an assessee makes a provision under clause (viia) in respect of bad debts relating to rural advances only, to deny such an assessee the benefit provided under clause (vii) which is available to all other assessees who are engaged in money lending business will result in discrimination without reason. The Legislature cannot be presumed to have intended such a result in the case of scheduled banks. The intention of the Legislature in enacting the proviso to clause (vii) of section 36(1) and clause (v) to section 36(2) simultaneously is only to see that a double benefit in respect of the same bad debt is not being given to a scheduled bank. It is only for the said purpose, the proviso and clause (v) were introduced simultaneously by the Amendment Act, 1985, with effect from April 1, 1985. According to us, the scope of the proviso to clause (vii) of section 36(1) of the Act is only to deny the deduction to the extent of bad debt written off in the books with respect to which provision was made under clause (viia) of the Act. To make it clear, if the bad debt written off relates to debts other than for which the provision is made under clause (viia), such debts will fall squarely under the main part of clause (vii) which is entitled to deduction and in respect of that part of the debt with reference to which a provision is made under clause (viia), the proviso will operate to limit the deduction to the extent of the difference between that part of debt written off in the previous year and the credit balance in the provision for bad and doubtful debts account made under clause (viia). The first appellate authority in the case of the Dhanalakshmi Bank Ltd. for the assessment years 1985-86, 1986-87 and 1987-88 had held that any such debt “referred to in the proviso relate to the debts in respect of the rural branches and not to all debts”, and that since the bad debts written off in these two assessment years relate only to urban branches, there is no case to make any disallowance under the proviso to section 36(1)(vii) of the Act. However, the Tribunal did not go into the factual aspects of any of these cases. According to the Tribunal, the assessee-bank is entitled to the deduction under clause (vii) only of the difference between the provision made under clause (viia) and the bad debts written off in the accounts, without making any distinction in respect of debts relating to urban advances or rural advances. According to us, the Tribunal has not approached the issue in the proper perspective with reference to the provisions of sections 36(1)(vii), (viia) and 36(2)(v) of the Act. Now that we have explained the scope of the provisions of the proviso to clause (vii) of section 36(1) of the Act, we are of the view that the matter requires fresh consideration in the light of the said interpretation. Accordingly, we are of the view that the matter must go back to the Assessing Officer for consideration with reference to the interpretation placed by us in this judgment in the first instance. For the said limited purpose, we set aside the orders of the Tribunal and the first appellate authority on this point and direct the Assessing Officer to recompute the deduction available under clause (vii) of section 36(1) of the Act in the light of the interpretation placed by us on the proviso to the said clause under the section.

10. These appeals are disposed of as above.