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State Bank Of Patiala v. Commissioner Of Income Tax And

Punjab & Haryana High Court

May 21, 2004

Judgment

Subsequent
References

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Structured Summary of the Opinion

Factual and Procedural Background

The assessee filed an appeal under Section 260A of the Income-tax Act, 1961 against the Income-tax Appellate Tribunal, Chandigarh Bench-A's order dated August 4, 2003, which upheld the Assessing Officer's restriction of the assessee's claim for deduction under Section 36(1)(viia) to Rs. 1,19,36,000.

For assessment year 1985-86, the assessee's return claimed a deduction of Rs. 1,94,21,000 under Section 36(1)(viia). The Assessing Officer observed that the books of account for that assessment year showed a provision for bad debts of only Rs. 1,19,36,000 and restricted the deduction to that amount. The Commissioner of Income-tax (Appeals) upheld the disallowance by order dated July 20, 1988. The Tribunal also upheld the disallowance in the impugned order dated August 4, 2003. The assessee then appealed to this court under Section 260A.

Relevant timeline and factual points stated in the opinion:

The assessee originally filed its return for assessment year 1985-86 on September 27, 1995, claiming a deduction of Rs. 1,19,36,000 (as stated in the opinion).
The Finance Bill, 1985 amended Section 36(1)(viia) (increasing the rural-advances percentage used to compute deduction from 1/2% to 2%); the Bill received Presidential assent on May 24, 1985 and was given retrospective effect from April 1, 1985.
The assessee's previous year ended December 31, 1984; its balance-sheet was finalised on February 14, 1985, before the amendment. Because the amendment took effect after finalisation, the assessee filed a revised return on April 24, 1986 to enhance its claim from Rs. 1,19,36,000 to Rs. 1,94,21,000.
The Assessing Officer, CIT(A) and the Tribunal restricted the deduction to the amount actually provided in the books for the relevant assessment year, i.e., Rs. 1,19,36,000.

Legal Issues Presented

Whether a deduction under Section 36(1)(viia) of the Income-tax Act is allowable only to the extent of the provision for bad and doubtful debts actually made in the assessee's books of account for the relevant assessment year.
Whether a provision made in the books of a subsequent assessment year (or by filing a revised return after balance-sheet finalisation) can support an enhanced claim for deduction under Section 36(1)(viia) for the earlier assessment year when the statutory rate was retrospectively increased.

Arguments of the Parties

Appellant's Arguments

The assessee originally filed a return (as stated) claiming deduction under Section 36(1)(viia) at Rs. 1,19,36,000, which was admissible under the unamended provision.
An amendment in Finance Bill, 1985 increased the relevant percentage (from 1/2% to 2% for rural branches) and was made retrospective from April 1, 1985 upon Presidential assent on May 24, 1985.
The assessee's balance-sheet for the previous year was finalised on February 14, 1985 (before the amendment), so the higher provision could not reasonably have been made in that balance-sheet; accordingly the assessee made up the shortfall in the provision in the balance-sheet of the subsequent assessment year and filed a revised return on April 24, 1986 to claim the enhanced deduction of Rs. 1,94,21,000.
The assessee contended there was substantial compliance with the requirement of law and that the authorities below were not justified in restricting the claim to Rs. 1,19,36,000.

Revenue's Position (Assessing Officer / CIT(A) / Tribunal)

The Assessing Officer noted that the books of account for the relevant assessment year showed a provision for bad debts of only Rs. 1,19,36,000 and accordingly restricted the deduction to that amount.
The Commissioner of Income-tax (Appeals) and the Tribunal upheld that restriction, treating the deduction as permissible only to the extent of the provision actually made in the books for that assessment year.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The court's analysis proceeded on the statutory language of Section 36(1)(viia) as applicable to the assessment year 1985-86 and the linked proviso to clause (vii) of Section 36(1). The reasoning set out in the opinion can be summarized as follows:

The statutory provision allows deduction "in respect of any provision for bad and doubtful debts made by a scheduled bank..." — thus the deduction is expressly linked to the provision "made". The court reads the provision to mean that a provision must actually have been made in the books of account for the deduction to be allowable.
The proviso to clause (vii) of Section 36(1), quoted in the opinion, further shows that the amount of deduction is limited by the credit balance in the provision for bad and doubtful debts account: this reinforces the requirement that the provision be reflected in the books for the relevant assessment year.
The Tribunal's approach was endorsed insofar as it distinguished other authorities relied on by the assessee: those authorities involved reserves/provisions that had been made in the books of account of the same assessment year before assessment completion, not provisions made in a subsequent assessment year.
In the present case the assessee did not make supplementary entries or revise its balance-sheet to show the enhanced provision in the books for the assessment year 1985-86; instead, the provision was made in the subsequent year's books. Because the statutory language is clear and unambiguous that deduction is in respect of a provision "made," the court held that the deduction must be limited to the amount actually provided in the books for that year (Rs. 1,19,36,000).
The court concluded that there is no room for an alternate interpretation of the statute on the facts before it; consequently no substantial question of law arose for consideration in the appeal.

Holding and Implications

Holding: The appeal is dismissed. The court upheld the Tribunal's conclusion that the deduction under Section 36(1)(viia) for assessment year 1985-86 must be limited to the provision actually made in the books for that year, i.e., Rs. 1,19,36,000. No costs were awarded.

Implications:

The direct effect on the parties is that the assessee's claim for deduction under Section 36(1)(viia) is restricted to the amount shown as provision in the books for the relevant assessment year; a provision made in a subsequent year's books cannot be used to increase the deduction for the prior year on these facts.
The court stated that the statutory language is clear and not capable of another interpretation; the opinion does not advert to creating or departing from broader precedent beyond applying the statute as written.

Show all summary ...

1. The assessee has filed this appeal under Section 260A of the Income-tax Act, 1961 (for short the "Act"), against the order of the Income-tax Appellate Tribunal, Chandigarh Bench-A, Chandigarh (for short "the Tribunal"), dated August 4, 2003, whereby the action of the Assessing Officer in restricting its claim for deduction of the provision for bad debts to Rs. 1,19,36,000 under Section 36(l)(viia) has been upheld.

2. The facts of the case are that in the return of income for the assessment year 1985-86, the assessee had claimed deduction of Rs. 1,94,21,000 under Section 36(l)(viia) of the Act. The Assessing Officer observed that in the books of account pertaining to the relevant assessment year, the assessee had made a provision for bad debts at Rs. 1,19,36,000 only. He, therefore, restricted the allowance to Rs. 1,19,36,000 only and disallowed the balance amount. The disallowance was upheld by the Commissioner of Income-tax (Appeals) (for short the CIT(A)) in appeal vide order dated July 20, 1.988. The assessee further preferred an appeal before the Tribunal and the Tribunal has also upheld the disallowance vide the impugned order dated August 4, 2003.

3. Mr. Akshay Bhan, learned counsel for the appellant, submitted that originally the assessee had filed its return of income for the assessment year 1985-86 on September 27, 1995, wherein deduction under Section 36(1)(viia) of the Act had been claimed at Rs. 1,19,36,000 which was admissible under that provision as it existed at the relevant time. The deduction available under that section was at 10 per cent, of the profit or 1/2 per cent, of the aggregate average advances made by the rural branches computed in the prescribed manner whichever was higher. However, an amendment to Section 36(1) of the Act was introduced in Parliament by the Finance Bill, 1985, whereby deduction was enhanced to 10 per cent, of the profit or 2 per cent, of the aggregate average advances made by the rural branches of the bank whichever was higher. The Bill attained the assent of the President on May 24, 1985. The amended provisions were given effect retrospectively from April 1, 1985.

4. Learned counsel pointed out that the previous year of the assessee had ended on December 31, 1984, and the assessee was required to get its accounts finalised and audited within three months from the end of the accounting year to submit the same to the Reserve Bank of India. Accordingly, the balance-sheet of the assessee was finalised on February 14, 1985, in which provision had been made on the basis of the unamended Section 36(l)(viia) of the Act. However, in view of the amendment of Section 36(1)(viia) of the Act with effect from April 1, 1985, it filed a revised return on April 24, 1986, enhancing the claim for deduction from Rs. 1,19,36,000 to Rs. 1,94,21,000. Learned counsel explained that since the amendment in this section had been made after the finalisation of the balance-sheet for the assessment year 1985-86, the assessee could not have possibly made the higher provision in that balance-sheet and accordingly it made up the shortfall in the provision in the balance-sheet of the subsequent assessment year. Thus, according to him, there was substantial compliance with the requirement of law and accordingly the authorities below were not justified in restricting the claim of the assessee to Rs. 1,19,36,000 only.

5. Section 36(1)(viia) of the Act as applicable to the assessment year 1985-86, reads as under :

"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."

6. A bare perusal of the above shows that the deduction allowable under the above provisions is in respect of the provision made. Therefore, making of a provision for bad and doubtful debt equal to the amount mentioned in this section is a must for claiming such deduction. The Tribunal has rightly pointed out that this issue stands further clarified from the proviso to clause (vii) of Section 36(1) of the Act, which reads as under :

"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."

7. This also clearly shows that making of provision equal to the amount claimed as deduction in the account books is necessary for claiming deduction under Section 36(1)(viia) of the Act. The Tribunal has distinguished various authorities relied upon by the assessee wherein deductions had been allowed under various provisions which also required creation of reserve after the assessee had created such reserve in the account books before the completion of the assessment. It has been correctly pointed out that in all those cases, reserves/provisions had been made in the books of account of the same assessment year and not of the subsequent assessment year.

8. In the present case, the assessee has not made any provision in the books of account for the assessment year under consideration, ie., 1985-86, by making supplementary entries and by revising its balance-sheet. The provision has been made in the books of account of the subsequent year.

9. We are, therefore, satisfied that the Tribunal was right in holding that since the assessee had made a provision of Rs. 1,19,36,000 for bad and doubtful debts, its claim for deduction under Section 36(1)(viia) of the Act had to be restricted to that amount only. Since the language of the statute is clear and is not capable of any other interpretation, we are satisfied that no substantial question of law arises in this appeal for consideration by this court.

10. The appeal is, accordingly, dismissed. No costs.