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| DATE: | February 20, 2012 (Date of publication) |
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| Click here to download the judgement (catholic_syrian_bank_bad_debts_better_copy.pdf) |
36(1)(vii)/36(1)(viia) Bad Debts: Banks are entitled to both deductions
The Supreme Court had to consider whether a bank was eligible to claim a deduction for bad debts u/s 36(1)(vii) in respect of its (rural & urban) advances and also claim a provision for bad and doubtful debts u/s 36(1)(viia) in respect of its rural advances in view of the Proviso to s. 36(1)(vii) which provides that only the excess over the credit balance in the provision for bad and doubtful debts account made u/s 36(1)(viia) can be claimed. The Special Bench of the Tribunal in DCIT vs. Catholic Syrian Bank 88 ITD 185 held that as s. 36(1)(viia) was confined to rural advances, a claim for bad debts of urban advances was not subject to the limitation of the Proviso to s. 36(1)(vii). However, the Full Bench of the Kerala High Court took a contrary view in CIT vs. South Indian Bank 233 CTR 214 (Ker) (FB) and held that a bank was entitled to claim deduction of bad debts u/s 36(1)(vii) only to extent it exceeded the provision allowed as deduction under s. 36(1) (viia). On appeal to the Supreme Court, HELD reversing the Full Bench of the High Court:
Per Court:
(i) The clear legislative intent of s. 36(1)(vii) & 36(1)(viia) together with the circulars issued by the CBDT demonstrate that the deduction on account of provision for bad and doubtful debts u/s 36(1)(viia) is distinct and independent of s. 36(1)(vii) relating to allowance of bad debts. The legislative intent was to encourage rural advances and the making of provisions for bad debts in relation to such rural branches. The functioning of such banks is such that the rural branches were practically treated as a distinct business, though ultimately these advances would form part of the books of accounts of the head office. An interpretation which serves the legislative object and intent is to be preferred rather than one which subverts the same. The deduction u/s 36(1)(vii) cannot be negated by reading into it the limitations of s. 36(1)(viia) as it would frustrate the object of granting such deductions. The Revenue’s argument that this would lead to double deduction is not correct in view of the Proviso to s. 36(1)(vii) which provides that in respect of rural advances, the deduction on account of the actual write off of bad debts would be limited to excess of the amount written off over the amount of the provision which had already been allowed u/s 36(1) (viia) (Southern Technologies 320 ITR 577 (SC) & Vijaya Bank 323 ITR 166 (SC) referred)
(ii) U/s 119, the CBDT is entitled to issue Circulars to explain or tone down the rigours of law and to ensure fair enforcement of its provisions. These circulars have the force of law and are binding on the income tax authorities, though they cannot be enforced adversely against the assessee. Normally, these circulars cannot be ignored. A circular may not override or detract from the provisions of the Act but it can seek to mitigate the rigour of a particular provision for the benefit of the assessee in certain specified circumstances. So long as the circular is in force, it aids the uniform and proper administration and application of the provisions of the Act (UCO Bank vs. CIT 237 ITR 889 (SC) followed)
Per S. H. KAPADIA, CJI (concurring)
(iii) S. 36(1)(vii) & 36(1)(viia) are distinct and independent items of deduction and operate in their respective fields. S. 36(1)(vii) allows a deduction for bad debts in respect of urban and rural debts. However, by virtue of the Proviso to s. 36(1)(vii), the deduction in respect of rural debts is limited to the extent of difference between the debt or part thereof written off in the previous year and the credit balance in the provision for bad and doubtful debts account made under s. 36(1) (viia). The proviso prevents benefit of double deduction with reference to rural loans. This is in consonance with the CBDT’s interpretation in the Circulars.
Reaction (impromptu):
The SC has undoubtedly , in its wisdom, taken the absolutely right view, rather-so far as one could see- the ONLY POSSIBLE VIEW; that is, on the crucial but clinching ground that “S. 36(1)(vii) & 36(1)(viia) are distinct and independent items of deduction and operate in their respective fields.”
Such court cases, being reported off and on, more frequently in recent times, perforce leaves one painfully wondering/debating with self, – Is this a proposition on which the Revenue itself could have had any genuine doubt or rightly urged to be a “question of law:” (or a ‘substantial question of law’ as per the amended enactment) to be dragged on unto the last stage of adjudication.
To put it differently, is it not a case where, – had the point of dispute been considered in proper light, particularly in the light of the relevant /applicable aids /useful principles of interpretation as propounded and elucidated by ‘ court case law’ and available in abundance, – the Revenue ought not to have, in all fairness, at all urged; more so, not to have been permitted to pursue up to the ‘north’?????
Whither sincerity, or an iota of it, in the lately debated ‘simplification’! Whither scope for accomplishing, even remotely, the commonly desired and canvassed goal of putting an end to ‘frivolous court litigation’; also, publicly announced by the ‘people’ in governance itself !!
The apex court had overlooked the fact that nowhere in section 36(1)(vii)(a) it was stated that the said provision does not apply to provision for bad and doubtful debts in relation to advance made in urban branch or the said section applies only to rural debt/advance