IMPORTANT POINT
Sections 36(1)(vii) and 36(1)(viia) are separate items of deduction.

Headnote:(a) Administration of Justice – Judicial propriety – Revenue not challenging judgment of Special Bench of ITAT relating to previous years – Attaining finality for those years – No binding on Revenue for subsequent years particularly when issues are different and question of law is involved. (Para 13)
        (b) Interpretation – Circulars – Bind the department, not the assesses – Circulars aid the uniform and proper administration and application of the provisions of the Act. (Para 18)
        (1999) 4 SCC 599 – Referred
        UCO Bank, Calcutta v. Commissioner of Income Tax, W.B., (1999) 4 SCC 599 [Para 18]
       – Referred
        (c) Income Tax Act, 1963 – Sections 36(1)(vii) and 36(1)(viia) – Deduction on account of provisions 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 – 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 Section 36(1)(viia). (Para 25)
        (2010) 2 SCC 548 – Relied upon
        (2003) 262 ITR 579 – Approved
        (d) Income Tax Act, 1963 – Sections 36(1) and 36(2) – Double benefit in respect of the same debt is not given to a scheduled bank having both urban and rural branches – It may give advances from both branches with separate provision accounts for each. (Para 30)
        (e) Income Tax Act, 1963 – Section 36(1)(vii) and Sections 36(1)(viia) and 36(2)(v) – Proviso to Section 36(1)(vii), 36(1)(viia) and 36(2)(v) have to be read and construed together – 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 main part of Section 36(1)(vii). (Paras 40 and 41)
       Facts of the case:
        The scope and ambit of the proviso to clause (vii) of sub-section (1) of
        Income Tax Act, 1963 is in question in these appeals.
       Finding of the Court:
        Sections 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.

JUDGMENT

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 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 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 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 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 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 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. CIT1 [(2003) 262 ITR 579], the CIT(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 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 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 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.

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 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 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 th

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2012 Supreme(SC) 146

IMPORTANT POINT Sections 36(1)(vii) and 36(1)(viia) are separate items of deduction.

Cases Referred (1)

IMPORTANT POINT
Sections 36(1)(vii) and 36(1)(viia) are separate items of deduction.