Supreme Court of India
CATHOLIC SYRIAN BANK LTD.versusCOMMISSIONER OF INCOME TAX, THRISSUR
- Citation
- 2012 INSC 95
- Decided
- 17 February 2012
- Disposal
- Disposed off
- Bench
- S H KAPADIA
Holding
Sections 36(1)(vii) and 36(1)(viia) provide distinct, independent deductions, and the proviso to clause (vii) limits the deduction only to the excess of a bad‑debt write‑off over the rural‑advance provision, thereby permitting both deductions without a double benefit.
Summary
Catholic Syrian Bank Ltd. appealed against the Commissioner of Income Tax, Thrissur, challenging the denial of a deduction for bad debts under Section 36(1)(vii) of the Income Tax Act, 1961. The bank argued that deductions under Section 36(1)(vii) (write‑off of irrecoverable debts) are independent of those under Section 36(1)(viia) (provision for bad and doubtful debts on rural advances) and that the proviso to clause (vii) only limits deduction to the excess of the write‑off over the rural provision, preventing double benefit. The Revenue contended that allowing both deductions would result in a double deduction and that the proviso applies to all banks. The Supreme Court held that the two provisions are distinct, the proviso applies only where clause (viia) is relevant (i.e., rural advances), and therefore the bank is entitled to both deductions without double benefit. The Court set aside the Revenue’s appeals and allowed the banks’ appeals, remanding the matters for recomputation.
Issues considered
- The scope and ambit of the proviso to clause (vii) of Section 36(1) – does it apply only to rural advances covered by clause (viia) or to all banks?
- Whether the Full Bench of the Kerala High Court erred in limiting the deduction under Section 36(1)(vii) to the excess over the provision made under clause (viia).
- Whether a deduction under Section 36(1)(vii) can be claimed independently of the deduction under Section 36(1)(viia) without resulting in a double deduction.
Legislation cited
- Income Tax Act, 1961s. 119, s. 36(1)(vii), s. 36(1)(viia), s. 36(2), s. 36(2)(v)
Subjects
Income TaxBad Debt DeductionSection 36Rural AdvancesDouble DeductionCircularsInterpretation of StatutesScheduled Commercial Bank
Judgment
[2012] 4 S.C.R. 739
CATHOLIC SYRIAN BANK LTD. A
V.
COMMISSIONER OF INCOME TAX, THRISSUR
(Civil Appeal No. 1143 of 2011)
FEBRUARY 17, 2012
B
[S.H. KAPADIA, CJI, A.K. PATNAIK AND SWATANTER
KUMAR, JJ.]
Income Tax Act, 1961:
ss. 36(1 )(vii) and 36(1 )(viia) read with s. 36(2) -
c
Interpretation of - Scope and ambit of the proviso to clause
(vii) of sub-section (1) of s.36 - Discussed - Held: The
provisions of s.36(1)(vii) and s.36(1)(viia) are distinct and
independent items of deduction and operate in their
respective fields - Scheduled commercial banks would get the D
full benefit of the write off of the irrecoverable debt(s) under
s.36{1)(vii) in addition to the benefit of deduction for the
provision made for bad and doubtful debt(s) under
s.36(1)(viia).
E
s. 119 - Circulars issued by Central Board of Direct Taxes
(CBDT) - Effect of - Discussed.
Questions of law relating to interpretation of Sections
36(1)(vii) and 36(1)(viia) read with Section 36(2) of the F
Income Tax Act, 1961 and the scope and ambit of the
proviso to clause (vii) of sub-section (1) of Section 36 of
the Act arose for consideration in the present appeal.
The assessee-bank (appellant) contended that the
deduction allowable under Section 36(1 )(vii) of the Act is G
independent of deduction under Section 36(1)(viia) of the
Act; that distinct and different items of account are
maintained by the bank in the normal course of its
business and it is not permissible to interchange these
739 H
740 SUPREME COURT REPORTS [2012] 4 S.C.R.
A items in accordance with the settled standards of
accountancy or even in law; and further that as similar
claims had been decided in favour of the banks for earlier
assessment years, by Special Bench of the ITAT, which
had not been challenged by the Department, as such, the
8 issue had attained finality and could not be disturbed in
the subsequent years.
The Revenue on the other hand contended that it
would amount to allowing a double deduction if the
provisions of Sections 36(1 )(vii) and 36(1 )(viia) are
C permitted to operate independently and that the proviso
to Section 36(1 )(vii) was introduced with the intention to
prevent this mischief.
Allowing the appeals filed by the assessees and
D dismissing the appeals filed by the Revenue, the Court
Per Swatanter Kumar, J. [for himself and Patnaik, J.]
HELD: 1. Merely because the orders of the Special
Bench of the ITAT were not assailed in appeal by the
E Department itself, this would not take away the right of
the Revenue to question the correctness of the orders of
assessment, particularly when a question of law is
involved. [Para 13] [759-E]
F 2.1. It is a settled canon of interpretation of fiscal
statutes that they need to be construed strictly and on
their plain reading. Sections 36(1 )(vii) and 36(1 )(viia)
provide for such deductions, which are to be permitted,
in accordance with the language of these provisions. A
bare reading of these provisions show that Sections
G 36(1 )(vii) and 36(1 )(viia) are separate items of deduction.
These are independent provisions and, therefore, cannot
be intermingled or read into each other. [Para 16] [763-D,
E]
H 2.2. The provisions of Section 36(1)(vii) would come
CATHOLIC SYRIAN BANK LTD. v. COMMISSIONER OF 741
INCOME TAX, THRISSUR
into play in the grant of deductions, subject to the A
limitation contained in Section 36(2) of the Act. Any bad
debt or part thereof, which is written off as irrecoverable
in the accounts of the assessee for the previous year is
the deduction which the assessee would be entitled to
get, provided he satisfies the requirements of Section B
36(2) of the Act. Allowing of deduction of bad debts is
controlled by the provisions of Section 36(2). As regards
the argument advanced on behalf of the Revenue that it
would amount to allowing a double deduction if the
provisions of Sections 36(1 )(vii) and 36(1 )(viia) are c
permitted to operate independently, there is no doubt that
a statute is normally not construed to provide for a
double benefit unless it is specifically so stipulated or is
clear from the scheme of the Act. As far as the question
of double benefit is concerned, the Legislature in its 0
wisdom introduced Section 36(2)(v) by the Finance Act,
1985 with effect from 01.04.1985. Section 36(2)(v)
concerns itself as a check for claim of any double
deduction and has to be read in conjunction with Section
36(1 )(viia) of the Act. It requires the assessee to debit the E
amount of such debt or part thereof in the previous year
to the provision made for that purpose. [Para 17] [763-F-
H; 764-A, BJ
3.1. Circulars can be issued by the Central Board of
Direct Taxes to explain or tone down the rigours of law F
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 G
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 H
742 SUPREME COURT REPORTS [2012] 4 S.C.R.
A Act. [Para 18) [764-D, F]
3.2. In the present case, after introduction of Section
36(1 )(viia) by the Finance Act, 1979, ((1981) 131 ITR (St.)
88), with effect from 1st April, 1980, Circular No. 258 dated
14th June, 1979 was issued by the Board to clarify the
8
application of the new provisions. The Circular found it
relevant to mention that the provisions of new clause
(viia) of Section 36(1), relating to the deduction on
account of provisions for bad and doubtful debts, is
C distinct and independent of the provisions of Section
36(1 )(vii) relating to allowance of deduction of the bad
debts. In other words, the scheduled commercial banks
would continue to get the benefit of the write-off of the
irrecoverable debts under Section 36(1)(vii) in addition to
the benefit of deduction of the provision for bad and
D doubtful debts under Section 36(1)(viia). (Para 19] (764-
F, G; 765-8, CJ
3.3. A Circular No.421 dated 12th June, 1985 ((1985)
156 ITR (St.) 130] attempted to explain the amendments
E made to Section 36 and also explained the provisions of
clause (viia) of Section 36(1 ). Still another circular being
Circular No.464, dated 18th July, 1986 ((1986) 161 ITR(St.)
66) was issued with the intention to explain the
amendments made by the Income Tax (Amendment) Act,
F 1986. [Para 21, 22] (765-E; 767-A]
3.4. Clear legislative intent of the relevant provisions
and unambiguous language of the circulars with
reference to the amendments to Section 36 of the Act
demonstrate that the deduction on account of provisions
G for bad and doubtful debts under Section 36(1)(viia) is
distinct and independent of the provisions of Section
36(1)(vii) relating to allowance of the bad debts. The
legislative intent was to encourage rural advances and
the making of provisions for bad debts in relation to such
H rural branches. Another material aspect of the
CATHOLIC SYRIAN BANK LTD. v. COMMISSIONER OF 743
INCOME TAX, THRISSUR
functioning of such banks is that their rural branches A
were practically treated as a distinct business, though
ultimately these advances would form part of the books
of accounts of the principal or head office branch. Thus,
this Court would be more inclined to give an
interpretation to these provisions which would serve the 8
legislative object and intent, rather than to subvert the
same. The Circulars in question show a trend of
encouraging rural business and for providing greater
deductions. The purpose of granting such deductions
would stand frustrated if these deductions are implicitly C
neutralized against other independent deductions
specifically provided under the provisions of the Act. To
put it simply, the deductions permissible under Section
36(1)(vii) should not be negated by reading into this
provision, limitations of Section 36(1 )(viia) on the
reasoning that it will form a check against double 0
deduction. Such approach would be erroneous and not
applicable on the facts of the case in hand. [Para 24) [768-
D-H; 769-A]
4.1. The language of Section 36(1 )(vii) of the Act is E
unambiguous and does not admit of two interpretations.
It applies to all banks, commercial or rural, scheduled or
unscheduled. It gives a benefit to the assessee to claim
a deduction on any bad debt or part thereof, which is
written off as irrecoverable in the accounts of the F
assessee for the previous year. This benefit is subject
only to Section 36(2) of the Act. It is obligatory upon the
assessee to prove to the assessing officer that the case
satisfies the ingredients of Section 36(1)(vii) on the one
hand and that it satisfies the requirements stated in G
Section 36(2) of the Act on the other. The proviso to
Section 36(1)(vii) does not, in absolute terms, control the
application of this provision as it comes into operation
only when the case of the assessee is one which falls
squarely under Section 36(1)(viia) of the Act. Also the H
744 SUPREME COURT REPORTS [2012] 4 S.C . R.
A explanation to Section 36(1 )(vii), introduced by the
Finance Act, 2001, has to be examined in conjunction
with the principal section. The explanation specifically
excluded any provision for bad and doubtful debts made
in the account of the assessee from the ambit and scope
8 of 'any bad debt, or part thereof, written off as
irrecoverable in the accounts of the assessee'. Thus, the
concept of making a provision for bad and doubtful
debts will fall outside the scope of Section 36(1 )(vii)
simplicitor. The proviso will have to be read with the
C provisions of Section 36(1 )(viia) of the Act. Once the bad
debt is actually written off as irrecoverable and the
requirements of Section 36(2) satisfied, then, it will not be
permissible to deny such deduction on the apprehension
of double deduction under tile provisions of Section
36(1)(viia) and proviso to Section 36(1)(vii). This does not
D appear to be the intention of the framers of law. The
scheduled and non-scheduled commercial banks would
continue to get the full benefit of write off of the
irrecoverable debts under Section 36(1 )(vii) in addition to
the benefit of deduction of bad and doubtful debts under
E Section 36(1 )(viia). Mere provision for bad and doubtful
debts may not be allowable, but in the case of a rural
advance, the same, in terms of Section 36(1 )(viia)(a), may
be allowable without insisting on an actual write off. [Para
25] [769-B-H; 770-A-B]
F
4.2. The Special Bench of the ITAT had rejected the
contention of the Revenue that proviso to Section
36(1)(vii) applies to all banks and with reference to the
circulars issued by the Board, held that a bank would be
G entitled to both deductions, one under clause (vii) of
Section 36(1) of the Act on the basis of actual write off
and the other on the basis of clause (viia) of Section 36(1)
of the Act on the mere making of provision for bad debts.
This, according to the Revenue, would lead to double
H deduction and the proviso to Section 36(1 )(vii) was
CATHOLIC SYRIAN BANK LTD. v. COMMISSIONER OF 745
INCOME TAX, THRISSUR
introduced with the intention to prevent this mischief. The A
contention of the Revenue was rightly rejected by the
Special Bench of the ITAT and it correctly held that the
Board itself had recognized the position that a bank
would be entitled to both the deductions. Further, it
concluded that the proviso had been introduced to B
protect the Revenue, but it would be meaningless to
invoke the same where there was no threat of double
deduction. [Para 26] [770-C-E]
4.3. As per this proviso to clause (vii), the deduction C
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
under clause (viia). The proviso by and large protects the
interests of the Revenue. In case of rural advances which
are covered by clause (viia), there would be no such D
double deduction. The proviso, in its terms, limits its
application to the case of a bank to which clause (viia)
applies. Indisputably, clause (viia)(a) applies only to rural
advances. [Para 27] [770-G-H; 771-A]
E
4.4. As far as foreign banks are concerned, under
Section 36(1 )(viia)(b) and as far as public financial
institutions or State financial corporations or State
industrial investment corporations are concerned, under
Section 36(1)(viia)(c), they do not have rural branches. F
Thus, it can safely be inferred that the proviso is self
indicative that its application is to bad debts arising out
of rural advances. [Para 28] [771-B]
4.5. The scope of the proviso to clause (vii) of Section
36(1) has to be ascertained from a cumulative reading of G
the provisions of clauses (vii), (viia) of Section 36(1) and
clause (v) of Section 36(2) and only shows that a double
benefit in respect of the same debt is not given to a
scheduled bank. A scheduled bank may have both urban
and rural branches. It may give advances from both H
746 SUPREME COURT REPORTS [2012] 4 S.C.R.
A branches with separate provision accounts for each.
(Para 30) (772-G-H]
5. 1. In the normal course of its business, an assessee
bank is to maintain different accounts for the rural debts
for non-rural/urban debts. It is obvious that the branches
B
in the rural areas would primarily be dealing with rural
debts while the urban branches would deal with
commercial debts. Maintenance of such separate
accounts would not only be a matter of mere convenience
C but would be the requirement of accounting standards.
(Para 32) (773-E-F]
5.2. It is contended, and rightly so, on behalf of the
assessee bank that under law, it is obliged to maintain
accounts which would correctly depict its statement of
D affairs. This obligation arises implicitly from the
requirements of the Act and certainly under the mandate
of accounting standards. [Para 33) [773-G]
5.3. Inter alia, following are the reasons that would
E fully support the view that a bank should maintain the
accounts with separate items for actual bad and
irrecoverable debts as well as provision for such debts.
It could, for valid reasons, have rural accounts more
distinct from the urban, commercial accounts.
F (a) It is obligatory upon each bank to ensure that
the accounts represent the correct statement
of affairs of the bank.
(b) Maintaining the common account may result
G in over stating the profits or the profits will
shoot up which would result in accruing of
liabilities not due.
(c) Accounting Standard (AS) 29, issued in 2003,
which concerns treatment of 'provisions,
H contingent liabilities and contingent assets'
CATHOLIC SYRIAN BANK LTD. v. COMMISSIONER OF 747
INCOME TAX, THRISSUR
Clauses 53 and 54 under the head 'Use of Provisions' A
justify maintenance of distinct and different accounts.
[Para 34, 35] [773-H; 774-A-C, F]
5.4. Merely because the Department has some
apprehension of the possibility of double benefit to the 8
assessee, this would not by itself be a sufficient ground
for accepting its interpretation. Furthermore, the
provisions of a section have to be interpreted on their
plain language and could not be interpreted on the basis
of apprehension of the Department. Under the C
accounting practice, the accounts of the rural branches
have to tally with the accounts of the head office. If the
repaid amount in subsequent years is not credited to the
profit and loss account of the head office, which is what
ultimately matters, then there would be a mismatch
between the rural branch accounts and the head office D
accounts. Therefore, in order to prevent such mismatch
and to be in conformity with the accounting practice, the
banks should maintain separate accounts. Of course, all
accounts would ultimately get merged into the account
of the head office, which will ultimately reflect one E
account (balance sheet), though containing different
items. [Para 36] (774-F-H; 775-A-B]
5.5. Another example that would support this view is
that, a bank can write off a loan against the account of F
'A' alone where it has advanced the loan to party 'A'. It
cannot write off such loan against the account of 'B'.
Similarly, a loan advanced under the rural schemes
cannot be written off against an urban or a commercial
loan by the bank in the normal course of its business. G
[Para 37] [775-C, D]
6.1. The Full Bench of the Kerala High Court
expressed the view that the Legislature did not make any
distinction between provisions created in respect of
advances by rural branches and advances by other H
748 SUPREME COURT REPORTS [2012] 4 S.C.R.
A branches of the bank. It also returned a finding while
placing emphasis on the proviso to Section 36(1 )(vii),
read with clause (v) of Section 36(2) of the Act that the
interpretation given by a· Division Bench of that Court in
the case of South Indian Bank was not a correct
B enunciation of law, inasmuch as the same would lead to
double deduction. It took the view that in a claim of
deduction of bad debts written off in non-rural/urban
branches in the previous year, by virtue of proviso to
Section 36(1 )(vii), the banks are entitled to claim
c deduction of such bad debts only to the extent it
exceeds the provision created for bad or doubtful rural
advances under clause (viia) of Section 36(1) of the Act.
This Court is unable to persuade itself to contribute to
this reasoning and statement of law. [Para 38) [775-D-G]
D 6.2. The Full Bench ignored the significant
expression appearing in both the proviso to Section
36(1)(vii) and clause (v) of Section 36(2), i.e., 'assessee to
which clause (viia) of sub-section (1) applies'. In other
words, if the case of the assessee does not fall under
E Section 36(1)(viia), the proviso/limitation would not come
into play. [Para 39) [775-H; 776-A]
7. In the proviso to Section 36(1)(vii), the explanation
to that Section, Section 36(1 )(viia) and 36(2)(v), the words
F used are 'provision for bad and doubtful debts' while in
the main part of Section 36(1)(vii), the Legislature has
intentionally not used such language. The proviso to
Section 36(1 )(vii) and Sections 36(1 )(viia) and 36(2)(v)
have to be read and construed together. They form a
G complete scheme for deductions and prescribe the extent
to which such deductions are available to a scheduled
bank in relation to rural loans etc., whereas Section
36(1 )(vii) deals with general deductions available to a
bank and even non-banking businesses upon their
H showing that an account had become bad and written off
CATHOLIC SYRIAN BANK LTD. v. COMMISSIONER OF 749
INCOME TAX, THRISSUR
as irrecoverable in the accounts of the assessee for the A
previous year, satisfying the requirements contemplated
in that behalf under Section 36(2). The provisions of
Section 36(1 )(vii) operate in their own field and are not
restricted by the limitations of Section 36(1)(viia) of the
Act. In addition to the reasons afore-stated, the view taken B
by the Special Bench of ITAT and the Division Bench of
the Kerala High Court in the case of South Indian Bank
are approved. {Para 40] [776-B-E]
8. The provisions of Sections 36(1)(vii) and 36(1)(viia) C
of the Act are distinct and independent items of deduction
and operate in their respective fields. The bad debts
written off in debts, other than those for which the
provision is made under clause (viia), will be covered
under the main part of Section 36(1 )(vii), while the proviso
will operate in cases under clause (viia) to limit deduction D
to the extent of difference between the debt or part
thereof written off in the previous year and credit balance
in the provision for bad and doubtful debts account made
under clause (viia). The proviso to Section 36(1 )(vii) will
relate to cases covered under Section 36(1)(viia) and has E
to be read with Section 36(2)(v) of the Act. Thus, the
proviso would not permit benefit of double deduction,
operating with reference to rural loans while under
Section 36(1 )(vii), the assessee would be entitled to
general deduction upon an account having become bad F
debt and being written off as irrecoverable in the
accounts of the assessee for the previous year. This
would be subject to satisfaction of the requirements
contemplated under Section 36(2). [Para 41] [776-F-H; 777-
A-B] G
South Indian Bank Ltd. v. CIT (2003) 262 ITR 579: UCO
Bank, Calcutta v. Commissioner of Income Tax, WB. (1999)
4 SCC 599: 1999(3)SCR 635; Southern Technologies Ltd.
v. Joint Commissioner of Income Tax, Coimbatore (2010) 2 H
750 SUPREME COURT REPORTS [2012] 4 S.C.R.
A SCC 548: 2010 (1) SCR 380 and Vijaya Bank v.
Commissioner of Income Tax and Anr. (2010) 5 SCC 416:
2010 (4) SCR 721 - referred to.
Per Chief Justice of India [Concurring]
B HELD: Under Section 36(1 )(vii) of the Income Tax Act,
1961, the tax payer carrying on business is entitled to a
deduction, in the computation of taxable profits, of the
amount of any debt which is established to have become
a bad debt during the previous year, subject to certain
C conditions. However, a mere provision for bad and
doubtful debt(s) is not allowed as a deduction in th1e
computation of taxable profits. In order to promote rural
banking and in order to assist the scheduled commercial
banks in making adequate provisions from their current
D profits to provide for risks in relation to their rural
advances, the Finance Act, inserted clause (viia) in sub-
section (1) of Section 36 to provide for a deduction, in the
computation of taxable profits of all scheduled
commercial banks, in respect of provisions made by
E them for bad and doubtful debt(s) relating to advances
made by their rural branches. The deduction is limited to
a specified percentage of the aggregate average
advances made by the rural branches computed in the
manner prescribed by the IT Rules, 1962. Thus, the
F provisions of clause (viia) of Section 36(1) relating to the
deduction on account of the provisio·n for bad and
doubtful debt(s) is distinct and independent of the
provisions of Section 36(1 )(vii) relating to allowance of
the bad debt(s). In other words, the scheduled
G commercial banks would continue to get the full benefit
of the write off of the irrecoverable debt(s) under Section
36(1 )(vii) in addition to the benefit of deduction for the
provision made for bad and doubtful debt(s) under
Section 36(1)(viia). A reading of the Circulars issued by
H CBDT indicates that normally a deduction for bad debt(s)
CATHOLIC SYRIAN BANK LTD. v. COMMISSIONER OF 751
INCOME TAX, THRISSUR
can be allowed only if the debt is written off in the books A
as bad debt(s). No deduction is allowable in respect of a
mere provision for bad and doubtful debt(s). But in the
case of rural advances, a deduction would be allowed
even in respect of a mere provision without insisting on
an actual write off. However, this may result in double B
allowance in the sense that in respect of same rural
advance the bank may get allowance on the basis of
clause (viia) and also on the basis of actual write off
under clause (vii). This situation is taken care of by the
proviso to clause (vii) which limits the allowance on the c
basis of the actual write off to the excess, if any, of the
write off over the amount standing to the credit of the
account created under clause (viia). However, the
Revenue disputes the position that the proviso to clause
(vii) refers only to rural advances. It says that there are
0
no such words in the proviso which indicates that the
proviso apply only to rural advances. There is no merit
in the objection raised by the Revenue. Firstly, CBDT itself
has recognized the position that a bank would be entitled
to both the deduction, one under clause (vii) on the basis E
of actual write off and another, on the basis of clause
(viia) in respect of a mere provision. Further, to prevent
double deduction, the proviso to clause (vii) was inserted
which says that in respect of bad debt(s) arising out of
rural advances, the deduction on account of actual write
off would be limited to the excess of the amount written F
off over the amount of the provision allowed under clause
(viia). Thus, the proviso to clause (vii) stood introduced
in order to protect the Revenue. It would be meaningless
to invoke the said proviso where there is no threat of
double deduction. In case of rural advances, which are G
covered by the provisions of clause (viia), there would be
no such double deduction. The proviso limits its
application to the case of a bank to which clause (viia)
applies. Clause (viia) applies only to rural advances. This
has been explained by the Circulars issued by CBDT. H
752 SUPREME COURT REPORTS [2012] 4 S.C.R.
A Thus, the proviso indicates that it is limited in its
application to bad debt(s) arising out of rural advances
of a bank. It follows that if the amount of bad debt(s)
actually written off in the accounts of the bank represents
only debt(s) arising out of urban advances, the allowance
B thereof in the assessment is not affected, controlled or
limited in any way by the proviso to clause (vii). (Para 2]
[777-G-H; 778-A-H; 779-A-E]
Case Law Reference:
c In the judgment of Swatanter Kumar, J.
(2003) 262 ITR 579 referred to Para 2
1999 (3) SCR 635 referred to Para 18
2010 (1) SCR 380 referred to Para 29
D
2010 (4) SCR 721 referred to Para 36
CIVIL APPELLATE JURISDICTION : Civil Appeal No.
1143 of 2011 etc.
E From the Judgment & Order dated 16.12.2009 of the High
Court of Kerala at Ernakulam in ITA No. 1167 of 2009.
WITH
1147, 1151, 1155, 1156-1160, 1170, 1171, 1172, 1173, 1174,
F 1175, 1176, 1177, 1178, 1179, 1180, 1181, 1182, 1183, 1184,
1185, 1186, 1187, 1188, 1189, 1190-1193, 1194, 1396 and
1397 of 2011.
G. Sarangan, S. Ganesh, Joseph Markose, R.P. Bhatt,
G Pratap Venugopal, Purushottam Kumar Jha, Namrata Sood,
Gaurav Nair for (K.J. John, & Co.,) S., Sukumaran, Anand
Sukumar, Bhupesh Kumar Pathak, Meera Mathur, Ajay K. Jain,
Vikas Garg, M.P. Vinod, Arijit Prasad, Kunal Bahri, Shankar
Divate, Madhusudhan Babu, B.V. Balaram Das, Sanjay Kunur,
Ramesh Keswani for (Keswani & Co.,) K. Rajeev for the
H appearing parties.
CATHOLIC SYRIAN BANK LTD. v. COMMISSIONER OF 753
INCOME TAX, THRISSUR
The Judgment of the Court was delivered by A
SWATANTER KUMAR, J. 1. The assessee in C.A. No.
1143 of 2011, a Scheduled Bank, filed its return of income for
the assessment year 2002-2003 on 24th October, 2002,
declaring total income of Rs. 61,15,610/-. The return was B
processed under Section 143(1) of the Income Tax Act, 1961
(for short 'the Act') and eligible refund was issued in favour of
the assessee. However, the assessing officer issued notice
under Section 143(2) of the Act to the assessee, after which
the assessment was completed. Inter alia, the assessing officer,
while dealing, under Section 143(3) of the Act, with the claim C
of the assessee for bad debts of Rs. 12,65,95,770/-, noticed
that the argument put forward on behalf of the assessee, that
the deduction allowable under Section 36(1 )(vii) of the Act is
independent of deduction under Section 36( 1)(viia) of the Act,
could not be accepted. Consequently, he observed that the D
assessee having a provision of Rs. 15,01,29,990/- for bad and
doubtful debts under Section 36(1 )(viia) of the Act could not
claim the amount of Rs. 12,65,95,770/- as deduction on account
of bad debts because the bad debts did not exceed the credit
balance in the provision for bad and doubtful debts account and E
also, the requirements of clause (v) of Sub-section (2) of
Section 36 of the Act were not satisfied. Therefore, the
assessee's claim for deduction of bad debts written off from
the account books was disallowed. This amount was added
back to the taxable income of the assessee, for which a F
demand notice and challan was accordingly issued. This order
of the assessing officer dated 24th January, 2005, was
challenged in appeal by the assessee on various grounds.
2. The Commissioner of Income Tax (Appeals) [hereafter G
referred to as 'the CIT(A)'], vide its order dated 7th April, 2006,
partly allowed the appeal, particularly in relation to the claim of
the appellant Bank for bad debts. Relying upon the judgment
of a Division Bench of the Kerala High Court in the case of
South Indian Bank Ltd. v. CIT [(2003) 262 ITR 579), the CIT(A) H
754 SUPREME COURT REPORTS [2012] 4 S.C.R.
A held that the claim of the appellant was fully supported by the
said decision and since the entire bad debts written off by the
bank under Section 36(1 )(vii) were pertaining to urban branches
only and not to the provision made for rural branches under
Section 36(1 )(viia), it was entitled to the deduction of the full
B claimed amount of Rs. 12,65,95,770/-. Consequently, he
directed deletion of the said amount.
3. For the years of assessment in question and being
aggrieved from the order of the CIT(A), the Revenue as well
as the assessee filed appeals before the Income Tax Appellate
C Tribunal, Cochin (for short, the 'ITAT'). All the appeals were
heard together and vide its order dated 16th April, 2007, while
relying upon the judgment of the jurisdictional High Court in the
case of South Indian Bank Ltd. (supra), the ITAT dismissed
the appeal of the Revenue on this issue and also granted certain
D other benefits to the assessee in relation to other items.
4. We consider it appropriate to notice at this stage the
fate of the orders passed for the previous assessment years
in relation to the appellant and other banks.
E
5. M/s. Dhanalakshmi Bank Ltd., one of the appellants
before us, had also raised the same issue before the ITAT in
Income Tax Appeal Nos.602-605 (Coch.) of 1994 and 190
(Coch.) of 1995, in relation to earlier assessment years. A view
had been expressed that there was no distinction made by the
F Legislature in the proviso to Section 36(1 )(vii) between rural
and non-rural advances and, therefore, its application cannot
be limited to rural advances. Under clause (viia) also, a bank
was held to be entitled to deduction in respect of the provisions
made for rural and non-rural advances, subject to limitations
G contained therein. Thus, the contention of the assessee in that
case, for deduction of bad debts from urban branches under
Section 36(1)(vii), was rejected. The earlier view taken by the
Tribunal in the case of Federal Bank in ITA Nos. 505, 854(Coch.)
of 1993, 376(Coch.) of 1995 and 284(Coch.) of 1995 held that
H the proviso to clause (vii) only bars the deduction of bad debts
CATHOLIC SYRIAN BANK LTD. v. COMMISSIONER OF 755
INCOME TAX, THRISSUR [SWATANTER KUMAR, J.]
arising out of rural advances, the actual right to set off bad A
debts in respect of non-rural and urban advances cannot be
controlled or restricted by application of the proviso and the
same would be allowed without making adjustment vis-a-vis the
provision for bad and doubtful debts. This view was obviously
favourable to the assessee. Noticing these contrary views in B
the cases of Dhanalakshmi Bank and Federal Bank, the matter
in the case of the appellant-Bank, for assessment years 1991-
92 to 1993-1994 was referred to a Special Bench of the ITAT
for resolving the issue. The Special Bench, vide its judgment
dated 9th August, 2002, had answered the question of law in c
the affirmative, holding that debts actually written off, which do
not arise out of the rural advances, are not affected by the
proviso to clause (vii) and that only those bad debts which arise
out of rural advances are to be deducted under Section
36(1)(viia) in accordance with the proviso to clause (vii). Finally,
0
the matter, in respect of the appellant-Bank, was ordered to be
placed before the assessing officer and with respect to other
banks, before the concerned benches of the ITAT. The order
of the Special Bench of the ITAT was implemented by the
Department and was never called in question. It may be noticed
here that in relation to earlier assessments, i.e. right from 1985- E
1986 to 1987-1988 in a similar case, different banks came up
for hearing in appeal before a Division Bench of the Kerala High
Court in the case of South Indian Bank Ltd. (supra) wherein,
as mentioned above, while discussing the scope of Section
36(1 )(viia) and 36(2)(v) of the Act, the High Court set aside the F
order of the Tribunal in that case and held that the assessee
was entitled to the deduction under clause (vii) irrespective of
the difference between the credit balance in the provision
account made under clause (viia) and the bad debts written off
in the books of accounts in respect of bad debts relating to G
urban or non-rural advances. It accepted the contention of the
assessee and referred the matter to the assessing officer. This
judgment of the High Court is subject matter of Civil Appeal
Nos. 1190-1193 of 2011 before us.
H
756 SUPREME COURT REPORTS [2012] 4 S.C.R.
A 6. However, the Department of Income Tax, being
dissatisfied with the order of the ITAT in assessment year
2002-2003, filed an appeal before the High Court under
Section 260A of the Act.
B 7. The Division Bench of the High Court of Kerala at
Ernakulam hearing the bunch of appeals against the order of
the ITAT, expressed the view that the judgment of that Court in
the case of South Indian Bank (supra) was not a correct
exposition of law. While dissenting therefrom, the Bench
directed the matter to be placed before a Fu!I Bench of the High
C Court.
8. That is how the matter came up for hearing before a Full
Bench of the High Court of Kerala at Ernakulam and vide its
judgment dated 16th December, 2009, the Full Bench not only
D answered the question of law but even decided the case on
merits. While setting aside the view taken by the Division Bench
in South Indian Bank (supra) and also the concurrent view
taken by the CIT(A) and the ITAT, the Full Bench of the High
Court held as under:-
E
"5 ... What is clear from the above is that provision for bad
and doubtful debts normally is not an allowable deduction
and what is allowable under main clause is bad debt
actually written off. However, so far as Banks to which
clause (viia) applies are concerned, they are entitled to
F claim deduction of provision under sub-clause (viia), but
at the same time when bad debt written is also claimed
deduction under clause (vii), the same will be allowed as
a deduction only to the extent it is in excess of the provision
created and allowed as a deduction under clause (viia). It
G is worthwhile to note that deduction under Section 36
(1 )(vii) is subject to sub-section (2) of Section 36 which in
clause (v) specifically states that any bad debt written off
should be claimed as a deduction only after debiting it to
the provision created for bad and doubtful debts. Further,
H in order to qualify for deduction of the bad debt written off,
CATHOLIC SYRIAN BANK LTD. v. COMMISSIONER OF 757
INCOME TAX, THRISSUR [SWATANTER KUMAR, J.]
the requirement of section 36 (2) (v) is that such amount A
should be debited to the provision created under clause
{viia) of claim deduction of provision under sub-clause
(viia), but at the same time when bad debt is written off is
also claimed deduction under clause (vii), the same will be
allowed as a deduction only to the extent it is in excess of B
the provision created and allowed as a deduction under
clause (viia). It is worthwhile to note that deduction under
section 36(1) {vii) is subject to sub section (2) of section
36 which in clause (v) specifically states that any bad. debt
written off should be claimed as a deduction only after c
debiting it to the provision created for bad and doubtful
debts. What is clear from the above provisions is that
though Respondent-Banks are entitled to claim deduction
of provision for bad and doubtful debts in terms of clause
(viia), such Banks are entitled to deduction of bad debt 0
actually written off only to the extent it is in excess of the
provision created and allowed as deduction under clause
(viia). Further, in order to qualify for deduction of bad debt
written off, the requirement of section 36 (2) (v) is that such
amount should be debited to the provision created under
clause (viia) of Section 36(1 ). Therefore, we are of the view E
that the distinction drawn by the Division Bench in SOUTH
INDIAN BANK'S case between the bad debts written off
in respect of advances made by Rural Branches and bad
debts pertaining to advances made by other Branches
does not exist and is not visualized under proviso to F
Section 36(1)(vii). We, therefore, hold that the said decision
of this Court does not lay down the correct interpretation
of the provisions of the Act. Admittedly all the Respondent-
assesses have claimed and have been allowed deduction
of provision in terms of clause {viia) of the Act. Therefore, G
when they claim deduction of bad debt written off in the
previous year by virtue of the proviso to section 36(1 )(vii),
they are entitled to claim deduction of such bad debt only
to the extent it exceeds the provision created and allowed
as deduction under clause (viia) of the Act. H
758 SUPREME COURT REPORTS [2012] 4 S.C.R.
A 6. In the normal course we should answer the question
referred to us by the Division Bench and send back the appeals
for the Division Bench to decide the appeals consistent with
the Full Bench decision. However, since this is the only issue
that arises in the appeals, we feel it would be only an empty
B formality to send back the matter to the Division Bench for
disposal of appeals consistent with our judgment. In order to
Avoid unnecessary posting of appeals before the Division
Bench, we allow the appeals by setting aside the orders of the
Tribunal and by restoring the assessments confirmed in first
c Appeals."
9. Dissatisfied from the judgment of the Full Bench of the
Kerala High Court, the assessee has filed the present appeal
purely on question of law.
D 10. The basic question of some significance, that arises
for consideration in the present appeals, is regarding the scope
and ambit of the proviso to clause (vii) of sub-section (1) of
Section 36 of the Act. According to the contention raised on
behalf of the assessee, the view taken by the Full Bench of the
E Kerala High Court cannot be sustained in law as there are
distinct and different items of account that are maintained by
the bank in the normal course of its business and it is not
permissible to interchange these items in accordance with the
settled standards of accountancy or even in law. As such, the
F claim of doubtful and bad debts could not have been added
back to taxable income as it was an additional liability of the
bank being shown as an independent item.
11. To put it more precisely, the contentious questions of
law that have been raised in the present appeals are as follows:-
G
"O) Whether the Full Bench of the High Court has grossly
erred in reversing the finding of the earlier Division Bench
that on a correct interpretation of the Proviso to clause (vii)
of Section 36(1) and clause (v) to Section 36(2) is only to
H deny the deduction to the extent of bad debts written off in
CATHOLIC SYRIAN BANK LTD. v. COMMISSIONER OF 759
INCOME TAX, THRISSUR [SWATANTER KUMAR, J.]
the books with. respect to which provision was made under A
clause (viia) of the Income Tax Act?
(k) Whether the Full Bench was correct in reversing the
findings of the earlier Division Bench that if the bad debt
written off relate to debt other than for which the provision B
is made under clause (viia), such debts will fall squarely
within the main part of clause (vii) which is entitled to be
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 C
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)?"
12. The appellant has contended that as the similar claims
had been decided in favour of the banks for the assessment D
years 1991-1992 to 1993-1994, by Special Bench of the ITAT,
which had not been challenged by the Department. As such,
the issue had attained finality and could not be disturbed in the
subsequent years.
E
13. The above contention of the appellant banks does not
impress us at all. Merely because the orders of the Special
Bench of the ITAT were not assailed in appeal by the
Department itself, this would not take away the right of the
Revenue to question the correctness of the orders of F
assessment, particularly when a question of law is involved.
There is no doubt that the earlier order of the CIT(A) had
merged into the judgment of the Special Bench of the ITAT and
attained finality for that relevant year. Equally, it is true that
though the Full Bench of the Kerala High Court specifically
overruled the Division Bench judgment of that very Court in the G
case of South Indian Bank (supra), it did not notice any of the
contentions before and principles stated by the Special Bench
of the ITAT in its impugned judgment. As already noticed, the
question raised in the present appeal go to the very root of the
matter and are questions of law in relation to interpretation of H
760 SUPREME COURT REPORTS [2012] 4 S.C.R.
A Sections 36(1 )(vii) and 36(1 )(viia) read with Section 36(2) of
the Act. Thus, without any hesitation, we reject the contention
of the appellant banks that the findings recorded in the earlier
assessment years 1991-1992 to 1993-1994 would be binding
on the Department for subsequent years as well.
B
14. Now, we would proceed to examine the provisions of
Sections 36(1 )(vii), 36(1 )(viia) and 36(2) of the Act and their
scope. It would be appropriate for this Court to notice the
relevant provisions of the Sections at this stage itself.
c "Section 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 - (i) to (vi) .....
D (vii) 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:
Provided that in the case of an assessee to which clause
E (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;
F
Explanation - For the purposes of this clause, any bad debt
or part thereof written off as irrecoverable in the accounts
of the assess shall not include any provision for bad and
doubtful debts made in the accounts of the assessee.
G
(viia) In respect of any provision for bad and doubtful debts
made by - (a) A scheduled bank not being 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
H
CATHOLIC SYRIAN BANK LTD. v. COMMISSIONER OF 761
INCOME TAX, THRISSUR [SWATANTER KUMAR, J.]
deduction under this clause and Chapter VI-A) and an A
amount not exceeding ten per cent of the aggregate
average advances made by the rural branches of such
bank computed in the prescribed manner;
Provided that a scheduled bank or a non-scheduled bank 8
referred to in this sub-clause shall, at its option, be allowed
in any of the relevant assessment years, deduction in
respect of any provision made by it for any assets
classified by the Reserve Bank of India as doubtful assets
or loss assets in accordance with the guidelines issued C
by it in this behalf, for an amount not exceeding five per
cent. of the amount of such assets shown in the books of
account of the bank on the last day of the previous year.
Provided further that for the relevant assessment years
commencing on or after the 1st day of April, 2003 and D
ending before the 1st day of April, 2005, the provisions of
the first proviso shall have effect as if for the words "five
per cent", the words "ten per cent" had been substituted :
Provided also that a scheduled bank or a non-scheduled E
bank referred to in this sub-clause shall, at its option, be
allowed a further deduction in excess of the limits
specified in the foregoing provisions, for an amount not
exceeding the income derived from redemption of
securities in accordance with a scheme framed by the
F
Central Government.
Explanation. - For the purposes of this. sub-clause,
"relevant assessment years" means the five consecutive
assessment years commencing on or after the 1st day of
April, 2000 and ending before the 1st day of April, 2005. G
Section 36 (2) In making any deduction for a bad debt or
part thereof, the following provisions shall apply -
(i) No such deduction shall be allowed unless such debt
H
762 SUPREME COURT REPORTS [2012] 4 S.C.R.
A or part thereof has been taken into account in computing
the income of the assessee of the previous year in which
the amount of such debt or part thereof is written off or of
an earlier previous year, or represents money lent in the
ordinary course of the business of banking or money-
B lending which is carried on by the assessee;
(ii) If the amount ultimately recovered on any such debt or
part of debt is less than the difference between the debt
or part and the amount so deducted, the deficiency shall
be deductible in the previous year in which the ultimate
c recovery is made;
(iii) Any such debt or part of debt may be deducted if it
has already been written off as irrecoverable in the
accounts of an earlier previous year (being a previous year
D relevant to the assessment year commencing on the 1st
day of April, 1988, or any earlier assessment year), but the
Assessing Officer had not allowed it to be deducted on the
ground that it had not been established to have become
a bad debt in that year;
E
(iv) Where any such debt or part of debt is written off as
irrecoverable in the accounts of the previous year (being
a previous year relevant to the assessment year
commencing on the 1st day of April, 1988, or any earlier
assessment year) and the Assessing Officer is satisfied
F that such debt or part became a bad debt in any earlier
previous year not falling beyond a period of four previous
years immediately preceding the previous year in which
such debt or part is written off, provisions of sub-section
(6) of section 155 shall apply;
G
(v) 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
assessee has debited the amount of such debt or part of
H debt in that previous year to the provision for bad and
CATHOLIC SYRIAN BANK LTD. v. COMMISSIONER OF 763
INCOME TAX, THRISSUR [SWATANTER KUMAR, J.]
doubtful debts account made under that clause." A
15. The income of an assessee carrying on a business or
profession has to be assessed in accordance with the scheme
contained in Part 'D' of Chapter IV dealing with heads of
income. Section 28 of the Act deals with the chargeability of
8
income to tax under the head 'profits and gains of business or
profession'. All 'other deductions' available to an assessee
under this head of income are dealt with under Section 36 of
the Act which opens with the words 'the deduction provided for
in the following clauses shall be allowed in respect of matters C
dealt with therein, in computing the income referred to in
Section 28'. In other words for the purposes of computing the
income chargeable to tax, beside specific deductions, 'other
deductions' postulated in different clauses of Section 36 are
to be allowed by the assessing officer, in accordance with law.
D
16. Sections 36(1 )(vii) and 36(1 )(viia) provide for such
deductions, which are to be permitted, in accordance with the
language of these provisions. A bare reading of these
provisions show that Sections 36(1 )(vii) and 36(1 )(viia) are
separate items of deduction. These are independent provisions E
and, therefore, cannot be intermingled or read into each other.
It is a settled canon of interpretation of fiscal statutes that they
need to be construed strictly and on their plain reading.
17. The provisions of Section 36(1)(vii) would come into
play in the grant of deductions, subject to the limitation F
contained in Section 36(2) of the Act. Any bad debt or part
thereof, which is written off as irrecoverable in the accounts of
the assessee for the previous year is the deduction which the
assessee would be entitled to get, provided he satisfies the
requirements of Section 36(2) of the Act. Allowing of deduction G
of bad debts is controlled by the provisions of Section 36(2).
The argument advanced on behalf of the Revenue is that it
would amount to allowing a double deduction if the provisions
of Sections 36(1 )(vii) and 36(1 )(viia) are permitted to operate
independently. There is no doubt that a statute is normally not H
764 SUPREME COURT REPORTS [2012] 4 S.C.R.
A construed to provide for a double benefit unless it is specifically
so stipulated or is clear from the scheme of the Act. As far as
the question of double benefit is concerned, the Legislature in
its wisdom introduced Section 36(2)(v) by the Finance Act, 1985
with effect from 01.04.1985. Section 36(2)(v) concerns itself as
B a check for claim of any double deduction and has to be read
in conjunction with Section 36(1 )(viia) of the Act. It requires the
assessee to debit the amount of such debt or part thereof in
the previous year to the provision made for that purpose.
Effect of Circulars
c
18. Now, we shall proceed to examine the effect of the
circulars which are in force and are issued by the Central Board
of Direct Taxes (for short, 'the Board') in exercise of the power
vested in it under Section 119 of the Act. Ciiculars can be
D issued by the Board 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
E 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
F provisions of the Act. {Refer to UCO Bank, Calcutta v.
Commissioner of Income Tax, WB. (1999) 4 SCC 599]}.
19. In the present case, after introduction of Section
36(1)(viia) by the Finance Act, 1979, [(1981) 131 ITR (St.) 88],
with effect from 1st April, 1980, Circular No. 258 dated 14th
G June, 1979 was issued by the Board to clarify the application
of the new provisions. The provisions were introduced in order
to promote rural banking and assist the scheduled commercial
banks in making adequate provision from their current profits
to provide for risks in relation to their rural advances. The
H deductions were to be limited as specified in the Section. A
CATHOLIC SYRIAN BANK LTD. v. COMMISSIONER OF 765
INCOME TAX, THRISSUR [SWATANTER KUMAR, J.]
'rural branch' for the purpose of the Act had meant a branch of A
a scheduled bank, situated in a place with a population not
exceeding 10,000, according to the last preceding census of
which the relevant figures have been published. Under clause
13.3, the Circular found it relevant to mention that the provisions
of new clause (viia) of Section 36(1), relating to the deduction B
on account of provisions for bad and doubtful debts, is distinct
and independent of the provisions of Section 36(1)(vii) relating
to allowance of deduction of the bad debts. In other words, the
scheduled commercial banks would continue to get the benefit
of the write-off of the irrecoverable debts under Section c
36(1 )(vii) in addition to the benefit of deduction of the provision
for bad and doubtful debts under Section 36(1 )(viia).
20. The Finance Act, 1985, which was given effect from
1st April, 1985, added the proviso to Section 36(1 )(vii),
amended Section 36(1)(viia) and also introduced clause (v) to D
Section 36(2) of the Act. To complete the history of
amendments to these clauses, we may also notice that proviso
to Section 36(1)(viia)(a) was introduced by Finance Act, 1999
with effect from 1st April, 2000 and explanation to Section
36(1)(vii) was introduced by Finance Act, 2001 with effect from E
1st April, 2001.
21. A Circular No.421dated12th June, 1985 [(1985) 156
ITR (St.) 130] attempted to explain the amendments made to
Section 36 and also explained the provisions of clause (viia) F
of Section 36(1). It reads as under:
"Deduction in respect of provisions made by banking
companies for bad and doubtful debts.
17.1 Section 36(1 )(vii) of the Income-tax Act provides for G
a deduction in the computation of taxable profits of the
amount of any debt or part thereof which is established to
have become a bad debt in the previous year. This
allowance is subject to the fulfilment of the conditions
specified in sub-section (2) of section 36. H
766 SUPREME COURT REPORTS [2012) 4 S.C.R.
A 17.2 Section 36(1 )(viia) of the Income-tax Act provides for
a deduction 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, of any amount not exceeding 1% per cent of the
B aggregate average advances made by such branches.
17.3 Having regard to the increasing social commitments
of banks, section 36(1 )(viia) has been amended to provide
that in respect of any provision for bad and doubtful debts
made by a scheduled bank [not being a bank approved
c by the Central Government for the purposes of section
36(1 )(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 the
D proposed new provision) or two per cent of the aggregate
average advances made by rural branches of such banks,
whichever is higher, shall be allowed as a deduction in
computing the taxable profits.
E 17.4 Section 36(1 )(vii) of the Act has also been amended
to provide that in the case of a bank to which section
36(1)(viia) applies, the amount of bad and doubtful debts
shall be debited to the provision for bad and doubtful debts
account and that the deduction admissible under section
F 36(1)(vii) 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.
17.5 Section 36(2) has been amended by insertion of a
new clause (v) to provide that where a debt or a part of a
G debt considered bad or doubtful relates to advances made
by a bank to which section 36(1 )(viia) 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
H made under clause (viia) of section 36(1 )."
CATHOLIC SYRIAN BANK LTD. v. COMMISSIONER OF 767
INCOME TAX, THRISSUR [SWATANTER KUMAR, J.]
22. Still another circular being Circular No.464, dated 18th A
July, 1986 ((1986) 161 ITR(St.) 66] was issued with the intention
to explain the amendments made by the Income Tax
(Amendment) Act, 1986. Clause 5 of the Circular dealt with the
modifications introduced in respect of the deductions on
provisions for bad and doubtful debts made by the banks and B
it stated as follows :
"5. Modification in respect of deduction on provisions for
bad and doubtful debts made by the banks
5.1 Under the existing provisions of clause (viia) of sub- C
section (1) of section 36 of the Income-tax Act inserted by
the Finance Act, 1979, provision for bad and doubtful
debts made by scheduled or a non-scheduled Indian bank
is allowed as deduction within the prescribed limits. The
limit prescribed is 10% of the total income or 2% of the D
aggregate average advances made by the rural branches
of such banks, whichever is higher. It had been
represented to the Government that the foreign banks were
not entitled to any deduction under this provision and to
that extent, they were being discriminated against. Further, E
it was felt that the existing ceiling in this regard, i.e., 10%
of the total income or 2% of the aggregate average
advances made by the rural branches of Indian banks,
whichever is higher, should be modified. Accordingly, by
the Amending Act, the deduction presently available under F
clause (viia) of sub-section (1) of section 36 of the Income-
tax Act has been split into two separate provisions. One
of these limits the deduction to an amount not exceeding
2% of the aggregate average advances made by the rural
branches of the banks concerned. It may be clarified that G
foreign banks do not have rural branches and hence this
amendment will not be relevant in the case of the foreign
banks. The other provisions secure that a further deduction
shall be allowed in respect of the provision for bad and
doubtful debts made by all banks, not just the banks
incorporated in India, limited to 5% of the total income H
768 SUPREME COURT REPORTS [2012] 4 S.C.R.
A (computed before making any deduction under this clause
and Chapter VI-A). This will imply that all scheduled or non-
scheduled banks having rural branches would be allowed
the deduction up to 2% of the aggregate average
advances made by such branches and a further deduction
B up to 5% of their total income in respect of provision for
bad and doubtful debts."
23. Reference usefully can also be made to the Statement
of Objects and Reasons for the Finance Act, 1986, wherein,
inter alia, it was stated that the amendments were intended to
C provide a deduction on the provisions for bad debts made by
all banks upto 5 per cent of their total income and an additional
2 per cent of the aggregate average advances made by the
rural branches of the banks. These percentages stood altered
by subsequent amendments in 1993 and 2001.
D
24. Clear legislative intent of the relevant provisions and
unambiguous language of the circulars with reference to the
amendments to Section 36 of the Act demonstrate that the
deduction on account of provisions for bad and doubtful debts
E under Section 36(1 )(viia) is distinct and independent of the
provisions of Section 36(1 )(vii) relating to allowance of the bad
debts. The legislative intent was to encourage rural advances
and the making of provisions for bad debts in relation to such
rural branches. Another material aspect of the functioning of
F such banks is that their rural branches were practically treated
as a distinct business, though ultimately these advances would
form part of the books of accounts of the principal or head
office branch. Thus, this Court would be more inclined to give
an interpretation to these provisions which would serve the
G legislative object and intent, rather than to subvert the same.
The Circulars in question show a trend of encouraging rural
business and for providing greater deductions. The purpose of
granting such deductions would stand frustrated if these
deductions are implicitly neutralized against other independent
deductions specifically provided under the provisions of the Act.
H
CATHOLIC SYRIAN BANK LTD. v. COMMISSIONER OF 769
INCOME TAX, THRISSUR [SWATANTER KUMAR, J.]
To put it simply, the deductions permissible under Section A
36(1)(vii) should not be negated by reading into this provision,
limitations of Section 36(1 )(viia) on the reasoning that it will
form a check against double deduction. To our mind, such
approach would be erroneous and not applicable on the facts
of the case in hand. B
Interpretation and Construction of Relevant Sections
25. The language of Section 36(1)(vii) of the Act is
unambiguous and does not admit of two interpretations. It
applies to all banks, commercial or rural, scheduled or C
unscheduled. It gives a benefit to the assessee to claim a
deduction on any bad debt or part thereof, which is written off
as irrecoverable in the accounts of the assessee for the
previous year. This benefit is subject only to Section 36(2) of
the Act. It is obligatory upon the assessee to prove to the D
assessing officer that the case satisfies the ingredients of
Section 36( 1)(vii) on the one hand and that it satisfies the
requirements stated in Section 36(2) of the Act on the other.
The proviso to Section 36(1)(vii) does not, in absolute terms,
control the application of this provision as it comes into E
operation only when the case of the assessee is one which falls
squarely under Section 36(1)(viia) of the Act. We may also
notice that the explanation to Section 36(1)(vii), introduced by
the Finance Act, 2001, has to be examined in conjunction with
the principal section. The explanation specifically excluded any F
provision for bad and doubtful debts made in the account of
the assessee from the ambit and scope of 'any bad debt, or
part thereof, written off as irrecoverable in the accounts of the
assessee'. Thus, the concept of making a provision for bad and
doubtful debts will fall outside the scope of Section 36(1 )(vii) G
simplicitor. The proviso, as already noticed, will have to be read
with the provisions of Section 36(1 )(viia) of the Act. Once the
bad debt is actually written off as irrecoverable and the
requirements of Section 36(2) satisfied, then, it will not be
permissible to deny such deduction on the apprehension of H
770 SUPREME COURT REPORTS [2012] 4 S.C.R.
A double deduction under the provisions of Section 36(1)(viia)
and proviso to Section 36(1 )(vii). This does not appear to be
the intention of the framers of law. The scheduled and non-
scheduled commercial banks would continue to get the full
benefit of write off of the irrecoverable debts under Section
B 36(1)(vii) in addition to the benefit of deduction of bad and
doubtful debts under Section 36(1 )(viia). Mere provision for bad
and doubtful debts may not be allowable, but in the case of a
rural advance, the same, in terms of Section 36(1 )(viia)(a), may
be allowable without insisting on an actual write off.
c 26. The Special Bench of the ITAT had rejected the
contention of the Revenue that proviso to Section 36(1 )(vii)
applies to all banks and with reference to the circulars issued
by the Board, held that a bank would be entitled to both
deductions, one under clause (vii) of Section 36(1) of the Act
D on the basis of actual write off and the other on the basis of
clause (viia) of Section 36(1) of the Act on the mere making of
provision for bad debts. This, according to the Revenue, would
lead to double deduction and the proviso to Section 36(1 )(vii)
was introduced with the intention to prevent this mischief. The
E contention of the Revenue, in our opinion, was rightly rejected
by the Special Bench of the ITAT and it correctly held that the
Board itself had recognized the position that a bank would be
entitled to both the deductions. Further, it concluded that the
proviso had been introduced to protect the Revenue, but it
F would be meaningless to invoke the same where there was no
threat of double deduction.
27. As per this proviso to clause (vii), the deduction on
account of the actual write off of bad debts would be limited to
G excess of the amount written off over the amount of the provision
which had already been allowed under clause (viia). The
proviso by and large protects the interests of the Revenue. In
case of rural advances which are covered by clause (viia), there
would be no such double deduction. The proviso, in its terms,
limits its application to the case of a bank to which clause (viia)
H
CATHOLIC SYRIAN BANK LTD. v. COMMISSIONER OF 771
INCOME TAX, THRISSUR [SWATANTER KUMAR, J.]
applies. Indisputably, clause (viia)(a) applies only to rural A
advances.
28. As far as foreign banks are concerned, under Section
36(1 )(viia)(b) and as far as public financial institutions or State
financial corporations or State industrial investment 8
corporations are concerned, under Section 36(1)(viia)(c), they
do not have rural branches. Thus, it can safely be inferred that
the proviso is self indicative that its application is to bad debts
arising out of rural advances.
29. In a recent judgment of this Court, in Southern C
Technologies Ltd. v. Joint Commissioner of Income Tax,
Coimbatore ((2010) 2 SCC 548] (authored by one of us,
Kapadia, J., as he then was), both Sections 36(1)(vii) and
36(1 )(viia) were discussed. Then, this Court went on to state
how these provisions operate in the case of a Non Banking D
Financial Corporations (NBFC) vis-a-vis bank covered under
Section 36(1)(viia). The Court held as under:
"37. To understand the above dichotomy, one must
understand "how to write off'. If an assessee debits an E
amount of doubtful debt to the P&L account and credits
the asset account like sundry debtor's account, it would
constitute a write-off of an actual debt. However, if an
assessee debits "provision for doubtful debt" to the P&L
account and makes a corresponding credit to the "current
liabilities and provisions" on the liabilities side of the
F
balance sheet, then it would constitute a provision for
doubtful debt. In the latter case, the assessee would not
be entitled to deduction after 1-4-1989.
xxx xxx xxx G
58. Section 36(1 )(vii) provides for a deduction in the
computation of taxable profits for the debt established to
be a bad debt. Section 36(1 )(vii-a) provides for a
deduction in respect of any provision for bad and doubtful H
772 SUPREME COURT REPORTS [2012] 4 S.C.R.
A debt made by a scheduled bank or non-scheduled bank
in relation to advances made by its rural branches, of a
sum not exceeding a specified percentage of the
aggregate average advances by such branches.
59. Having regard to the increasing social commitment,
B
Section 36(1}(vii-a) has been amended to provide that in
respect of provision for bad and doubtful debt made by a
scheduled bank or a non-scheduled bank, an amount not
exceeding a specified per cent of the total income or a
specified per cent of the aggregate average advances
c made by rural branches, whichever is higher, shall be
allowed as deduction in computing the taxable profits.
Even Section 36(1)(vii) has been amended to provide that
in the case of a bank to which Section 36(1)(vii-a) applies,
the amount of bad and doubtful debt shall be debited to
D the provision for bad and doubtful debt account and that
the deduction shall be limited to the amount by which such
debt exceeds the credit balance in the provision for bad
and doubtful debt account.
E 60. The point to be highlighted is that in case of banks, by
way of incentive, a provision for bad and doubtful debt is
given the benefit of deduction, however, subject to the
ceiling prescribed as stated above. Lastly, the provision
for NPA created by a scheduled bank is added back and
F only thereafter deduction is made permissible under
Section 36(1 }(vii-a) as claimed."
30. 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
G (v) of Section 36(2) and only shows that a double benefit in
respect of the same debt is not given to a scheduled bank. A
scheduled bank may have both urban and rural branches. It may
give advances from both branches with separate provision
accounts for each.
H
CATHOLIC SYRIAN BANK LTD. v. COMMISSIONER OF 773
INCOME TAX, THRISSUR [SWATANTER KUMAR, J.]
31. It was neither in dispute earlier, nor dispute before us, A
that the assessee bank is maintaining two separate accounts,
one being a provision for bad and doubtful debts other than
provisions for bad debts in rural branches and another provision
account for bad debts in rural branches for which separate
accounts are maintained. This fact is evinced by the entries in B
the profit and loss account, balance sheet and break up details.
We need not deliberate this aspect with reference to records
at any greater length as this is not a matter in issue before us.
It was contended on behalf of the Revenue that the Revenue is
only concerned with the assessee as a single unit and not with c
how many separate accounts are being maintained by the
assessee and under what items. The Department, therefore,
would assess an assessee with reference to a single account
maintained in the head office of the concerned bank. This,
according to the learned counsel appearing for the D
Department, would further substantiate the argument of the
Department that the interpretation given by the Full Bench of
the High Court is the correct interpretation of Section 36(1 )(vii).
This argument has to be rejected, being without merit.
32. In the normal course of its business, an assessee bank E
is to maintain different accounts for the rural debts for non-rural/
urban debts. It is obvious that the branches in the rural areas
would primarily be dealing with rural debts while the urban
branches would deal with commercial debts. Maintenance of
such separate accounts would not only be a matter of mere F
convenience but would be the requirement of accounting
standards.
33. It is contended, and rightly so, on behalf of the
assessee bank that under law, it is obliged to maintain accounts G
which would correctly depict its statement of affairs. This
obligation arises implicitly from the requirements of the Act and
certainly under the mandate of accounting standards.
34. Inter alia, following are the reasons that would fully
support the view that a bank should maintain the accounts with H
CATHOLIC SYRIAN BANK LTD. v. COMMISSIONER OF 773
INCOME TAX, THRISSUR [SWATANTER KUMAR, J.]
31. It was neither in dispute earlier, nor dispute before us, A
that the assessee bank is maintaining two separate accounts,
one being a provision for bad and doubtful debts other than
provisions for bad debts in rural branches and another provision
account for bad debts in rural branches for which separate
accounts are maintained. This fact is evinced by the entries in B
the profit and loss account, balance sheet and break up details.
We need not deliberate this aspect with reference to records
at any greater length as this is not a matter in issue before us.
It was contended on behalf of the Revenue that the Revenue is
only concerned with the assessee as a single unit and not with c
how many separate accounts are being maintained by the
assessee and under what items. The Department, therefore,
would assess an assessee with reference to a single account
maintained in the head office of the concerned bank. This,
according to the learned counsel appearing for the D
Department, would further substantiate the argument of the
Department that the interpretation given by the Full Bench of
the High Court is the correct interpretatlan of Section 36(1)(vii).
This argument has to be rejected, being without merit.
32. In the normal course of its business, an assessee bank E
is to maintain different accounts for the rural debts for non-rural/
urban debts. It is obvious that the branches in the rural areas
would primarily be dealing with rural debts while the urban
branches would deal with commercial debts. Maintenance of
such separate accounts would not only be a matter of mere F
convenience but would be the requirement of accounting
standards.
33. It is contended, and rightly so, on behalf of the
assessee bank that under law, it is obliged to maintain accounts G
which would correctly depict its statement of affairs. This
obligation arises implicitly from the requirements of the Act and
certainly under the mandate of accounting ~tandards.
34. Inter alia, following are the reasons that would fully
support the view that a bank should maintain the accounts with H
774 SUPREME COURT REPORTS [2012] 4 S.C.R.
A separate items for actual bad and irrecoverable debts as well
as provision for such debts. It could, for valid reasons, have rural
accounts more distinct from the urban, commercial accounts.
(a) ltis obligatory upon each bank to ensure that the
accounts represent the correct statement of affairs
B
· of the bank.
(b) Maintaining the common account may result in over
stating the profits orJhe profits will shoot up which
would result in accruing of liabilities not due.
c
(c) Accounting Standard (AS) 29, issued in 2003,
which concerns treatment of 'provisions, contingent
liabilities and contingent assets'. Under the head
'Use of Provisions', clauses 53 and 54 state as
0 under:-
"53. A'provision should be used only for expenditures for
which the provision was originally recognised.
54. Only expenditures that relate to the original provision
E are adjusted against it. Adjusting expenditures against a
provision that was originally recognised for another
purpose would conceal the impact of two different events."
35. The above clauses justify maintenance of distinct and
F different accounts.
36. Merely because. the Department has some
apprehension of the possibility of double benefit to the
assessee, this would not by itself be a sufficient ground for
accepting its interpretation. Furthermore, the provisions of a
G section have to be interpreted on their plain language and could
not be interpreted on the basis of apprehension of the
Department. This Court, in the case of Vijaya Bank v.
Commissioner of Income Tax & Anr. [(2010) 5 SCC 416], held
that under the accounting practice, the accounts of the rural
H branches have to tally with the accounts of the head office. If
CATHOLIC SYRIAN BANK LTD. v. COMMISSIONER OF 775
INCOME TAX, THRISSUR [SWATANTER KUMAR, J.]
the repaid amount in subsequent years is not credited to the A
profit and loss account of the head office, which is what
ultimately matters, then there would be a mismatch between the
rural branch accounts and the head office accounts. Therefore,
in order to prevent such mismatch and to be in conformity with
the accounting practice, the banks should maintain separate B
accounts. Of C:ourse, all accounts would ultimately get merged
into the account of the head office, which will ultimately reflect
one account (balance sheet), though containing different items.
37. Another example that would support this view is that, C
a bank can write off a loan against the account of 'A' alone
where it has advanced the loan to party 'A'. It cannot write off
such loan against the account of 'B'. Similarly, a loan advanced
under the rural schemes cannot be written off against an urban
or a commercial loan by the bank in the normal course of its
business. D
38. The Full Bench of the Kerala High Court expressed the
view that the Legislature did not make any distinction between
provisions created in respect of advances by rural branches
and advances by other branches of the bank. It also returned a E
finding while placing emphasis on the proviso to Section
36(1 )(vii), read with clause (v) of Section 36(2) of the Act that
the interpretation given by a Division Bench of that Courts in
the case of South Indian Bank (supra) was not a correct
enunciation of law, inasmuch as the same would lead to double F
deduction. It took the view that in a claim of deduction of bad
debts written off in non-rural/urban branches in the previous
year, by virtue of proviso to Section 36(1 )(vii), the banks are
entitled to claim deduction of such bad debts only to the extent
it exceeds the provision created for bad or doubtful rural G
advances under clause (viia) of Section 36(1) of the Act. We
are unable to persuade ourselves to contribute to this reasoning
and statement of law.
39. Firstly, the Full Bench ignored the significant
expression appearing in both the proviso to Section 36(1 )(vii) 'H
776 SUPREME COURT REPORTS [2012] 4 S.C.R.
A and clause (v) of Section 36(2), i.e., 'assessee to which clause
(viia) of sub-section (1) applies'. In other words, if the case of
the assessee does not fall under Section 36(1 )(viia), the
proviso/limitation would not come into play.
B 40. It is useful to notice that in the proviso to Section
36(1)(vii), the explanation to that Section, Section 36(1)(viia)
and 36(2)(v), the words used are 'provision for bad and doubtful
debts' while in the main part of Section 36(1 )(vii), the
Legislature has intentionally not used such language. The
C proviso to Section 36(1 )(vii) and Sections 36(1 )(viia) and
36(2)(v) have to be read and construed together. They form a
complete scheme for deductions and prescribe the extent to
which such deductions are available to a scheduled bank in
relation to rural loans etc., whereas Section 36(1 )(vii) deals with
general deductions available to a bank and even non-banking
D businesses upon their showing that an account had become
bad and written off as irrecoverable in the accounts of the
assessee for the previous year, satisfying the requirements
contemplated in that behalf under Section 36(2). The provisions
of Section 36(1 )(vii) operate in their own field and are -not
E restricted by the limitations of Section 36(1)(viia) of the Act. In
addition to the reasons afore-stated, we also approve the view
taken by the Special Bench of ITAT and the Division Bench of
the Kerala High Court in the case of South Indian Bank (supra).
F 41. To conclude, we hold that the provisions of Sections
36(1 )(vii) and 36(1 )(viia) of the Act are distinct and independent
items of deduction and operate in their respective fields. The
bad debts written off in debts, other than those for which the
provision is made under clause (viia), will be covered under the
G main part of Section 36(1 )(vii), while the proviso will operate
in cases under clause (viia) to limit deduction to the extent of
difference between the debt or part thereof written off in the
previous year and credit balance in the provision for bad and
doubtful debts account made under clause (viia). The proviso
to Section 36(1 )(vii) will relate to cases covered under Section
H
CATHOLIC SYRIAN BANK LTD. v. COMMISSIONER 777
OF INCOME TAX, THRISSUR
36(1)(viia) and has to be read with Section 36(2)(v) of the Act. A
Thus, the proviso would not permit benefit of double deduction,
operating with reference to rural loans while under Section
36(1)(vii), the assessee would be entitled to general deduction
upon an account having become bad debt and being written
off as irrecoverable in the accounts of the assessee for the B
previous year. This, obviously, would be subject to satisfaction
of the requirements contemplated under Section 36(2).
42. Consequently, while answering the question in favour
of the assessee, we allow the appeals of the assessees and C
dismiss the appeals preferred by the Revenue. Further, we
direct that all matters be remanded to the assessing officer for
computation in accordance with law, in light of the law
enunciated in this judgment.
S. H. KAPADIA, CJI. 1. I have gone through the judgment D
of my esteemed brother Swatanter Kumar, J. and I agree with
the conclusions contained therein. However, I would like to give
my own reasons.
The question for our consideration is - whether on the facts E
and circumstances of the case, the assessee(s) is eligible
for deduction of the bad and doubtful debts actually written
off in view of Section 36(1 )(vii) which limits the deduction
allowable under the proviso to the excess over the credit
balance made under clause (viia) of Section 36(1) of
F
Income Tax Act, 1961 ("ITA" for short)?
2. Under Section 36(1)(vii) of the ITA 1961, the tax p~yer
carrying on business is entitled to a deduction, in the
computation of taxable profits, of the amount of any debt which
is established to have become a bad debt during the previous G
year, subject to certain conditions. However, a mere provision
for bad and doubtful debt(s) is not allowed as a deduction in
the computation of taxable profits. In order to promote rural
banking and in order to assist the scheduled commercial banks
in making adequate provisions from their current profits to H
778 SUPREME COURT REPORTS [2012] 4 S.C.R.
A provide for risks in relation to their rural advances, the Finance
Act, inserted clause (viia) in sub-section (1) of Section 36 to
provide for a deduction, in the computation of taxable profits
of all scheduled commerc!al banks, in respect of provisions
made by them for bad and doubtful debt(s) relating to advances
B made by their rural branches. The deduction is limited to a
specified percentage of the aggregate average advances
made by the rural branches computed in the manner prescribed
by the IT Rules, 1962. Thus, the provisions of clause (viia) of
Section 36(1) relating to the deduction on account of the
c provision for bad and doubtful debt(s) is distinct and
independent of the provisions of Section 36(1 )(vii) relating to
allowance of the bad debt(s). In other words, the scheduled
commercial banks would continue to get the full benefit of the
write off of the irrecoverable debt(s) under Section 36(1 )(vii) in
addition to the benefit of deduction for the provision made for
0
bad and doubtful debt(s) under Section 36(1)(viia). A reading
of the Circulars issued by CBDT indicates that normally a
deduction for bad debt(s) can be allowed only if the debt is
written off in the books as bad debt(s). No deduction is
E allowable in respect of a mere provision for bad and doubtful
debt(s). But in the case of rural advances, a deduction would
be allowed even in respect of a mere provision without insisting
on an actual write off. However, this may result in double
allowance in the sense that in respect of same rural advance
the bank may get allowance on the basis of clause (viia) and
F also on the basis of actual write off under clause (vii). This
situation is taken care of by the proviso to clause (vii) which
limits the allowance on the basis of the actual write off to the
excess, if any, of the write off over the amount standing to the
credit of the account created under clause (viia). However, the
G Revenue disputes the position that the proviso to clause (vii)
refers only to rural advances. It says that there are no such words
in the proviso which indicates that the proviso apply only to rural
advances. We find no merit in the objection raised by the
Revenue. Firstly, CBDT itself has recognized the position that
H a bank would be entitled to both the deduction, one under
CATHOLIC SYRIAN BANK LTD. v. COMMISSIONER 779
OF INCOME TAX, THRISSUR [S. H. KAPADIA, CJI.]
clause (vii) on the basis of actual write off and another, on the A
basis of clause (viia) in respect of a mere provision. Further,
to prevent double deduction, the proviso to clause (vii) was
inserted which says that in respect of bad debt(s) arising out
of rural advances, the deduction on account of actual write off
would be limited to the excess of the amount written off over B
the amount of the provision allowed under clause (viia). Thus,
the proviso to clause (vii) stood introduced in order to protect
the Revenue. It would be meaningless to invoke the said
proviso where there is no threat of double deduction. In case
of rural advances, which are covered by the provisions of clause c
(viia), there would be no such double deduction. The proviso
limits its application to the case of a bank to which clause (viia)
applies. Clause (viia) applies only to rural advances. This has
been explained by the Circulars issued by CBDT. Thus, the
proviso indicates that it is limited in its application to bad D
debt(s) arising out of rural advances of a bank. It follows that if
the amount of bad debt(s) actually written off in the accounts of
the bank represents only debt(s) arising out of urban advances,
the allowance thereof in the assessment is not affected,
controlled or limited in any way by the proviso to clause (vii).
E
3. Accordingly, the above question is answered in the
affirmative, i.e., in favour of the assessee(s). For the above
reasons, I agree that the appeals filed by the assessees stand
allowed and the appeals filed by the Revenue stand dismissed
with no order as to costs. F
B.B.B. Appeal disposed of.
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