The Income Tax Appellate Tribunal (ITAT) Mumbai Bench held that bad debts declared as Non-Performing Assets (NPS) before 01.04.2006 are allowed as deduction under Section 36(l)(vii) of Income Tax Act, 1961.
The assessee Abhyudaya Co-op Bank Limited is a co-operative bank and filed a return of income for Assessment Year 2012-13 declaring a total income of Rs.93,92,49,840/-. Subsequently, the assessee’s case was selected for scrutiny.
Accordingly, while passing the assessment order Assessing Officer (AO) found certain expenses and deductions claimed by the assessee were not correct and that the assessee has failed to disclose truly and fully all material facts necessary for assessment. Thereafter, the assesee filed return in response to notice under Section 148 Income Tax Act, 1961. The AO further disallowed the deduction claimed by the assessee under Bad Debts.
It was also contended that, as per the provisions of Section 36(1)(vii) of the Income Tax Act, only the bad debts over and above the balance of provision is allowed for deduction. As the assessee was having sufficient balance in provision account therefore the assessee was not eligible for any deduction under Section 36(1)(vii) of the Income Tax Act. In this regard, the assessee was shown as to why the deduction towards bad debts written off under Section 36(1)(vii) should not be disallowed.
Before the assessing officer, the assessee submitted that Section 36(1 )(viia) of the Income Tax Act, became applicable to Cooperative Banks after 1.4.2006. This section allows the deduction of provision made in the Books of Accounts towards Bad and Doubtful Debts.
Further, before applicability of provision of section 36(1) (viia) of the Income Tax Act to Co-op Banks i.e. prior to 01.04.2006, Bank had created provision for Bad and Doubtful Debt Reserve Accounts by debiting to profit and loss account which was disallowed by the Assessing Officer.
However, without considering the submission assessee disallowed the claim of assessee.
Aggrieved by the order, the assessee filed an appeal before the Commissioner of Income Tax (Appeal) CIT(A), who allowed the appeal in favour of the assessee. Therefore, the revenue filed appeal before the tribunal.
Keshav B Bhujle, the counsel for the assessee submitted that t the provisions of 36(1)(viia) Income Tax Act is applicable to cooperative banks only from AY 2007-08 and therefore any provision towards bad and doubtful debts standing in the account of a cooperative bank prior to 01.04.2006 will not come under the ambit of Section 36(1)(viia) Income Tax Act.
Manoj Kumar Sinha, Departmental representatives supported the decision of lower authorities.
During the appeal proceedings the tribunal observed that the. provision standing in the account of a cooperative bank prior to 01.04.2006 would not come in the ambit of section 36(l)(viia) Income Tax Act.
Further if any bad debts written off for which a provision has been created prior to 01.04.2006 will be entitled for deduction under section 36(l)(viia) Income Tax Act if the conditions stipulated under section 36(2) Income Tax Act are satisfied.
The tribunal after reviewing the facts and submissions of the both parties the two-member bench of Kavitha Rajagopal (Judicial Member) and Padmavathy S. (Accountant Member) held that deduction claimed by the assessee under Section 36(1)(vii) Income Tax Act should be allowed since the same pertains to advances classified as NPA prior to 01.04.2006.
Therefore, the bench dismissed the appeal filed by the revenue.
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