Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2025 Supreme(Online)(ITAT) 23215

INCOME TAX APPELLATE TRIBUNAL (RAJKOT BENCH)
Arjun Lal Saini, Accountant Member, Dinesh Mohan Sinha, Judicial Member
Rajkot District Co-operative Bank Ltd. – Appellant
Versus
Deputy Commissioner of Income-tax – Respondent
ITA No.196/RJT/2024

Advocates:
For the Appellants/Petitioners: D.M. Rindani
For the Respondents: Pallavi

When a provision for bad and doubtful debts is claimed and allowed as a deduction under the Act, the subsequent reversal or write-back of such a provision constitutes taxable income, as it represents a recoupment of an amount previously allowed as an expense.

Headnote:(A) Income Tax Act, 1961 - Section 36(1)(vii) and 36(1)(viia) - Provision for bad and doubtful debts - Claim for deduction - Write back of provision - Taxability as income - The provision for bad and doubtful debts, when claimed and allowed as a deduction under the Act, must be treated as income when reversed or written back. The fundamental principle is that if a liability or provision previously claimed as an expense is no longer required, the amount so written back constitutes taxable income. (Paras 15, 16, 21)

(B) Accounting Principles - Provision for bad and doubtful debts - Routing through profit and loss account - As per accounting standards, when there is a write-back of an earlier recognized provision and no new provision is recognized, the write-back should be recognized as income in the statement of profit and loss. (Para 17)

(C) Income Tax Act, 1961 - Section 263 - Revisionary powers - Explanation 2 to section 263 - Invocation by the Principal Commissioner - It is not necessary to explicitly point out the specific explanation invoked in the show cause notice provided the assessee has been confronted with the underlying error regarding inadequate inquiry in the assessment order. (Paras 35, 36)

Facts of the case:
The appellant, a banking entity, claimed deductions under the Act for provisions created for bad and doubtful debts relating to rural advances. During the relevant assessment year, the bank transferred a portion of these accumulated provisions to a general reserve account without routing the entry through the profit and loss account. The tax authorities treated this transfer (write-back) as taxable income, as the original provision had been allowed as a deduction in prior years. The initial assessment was later revised under Section 263 of the Act, leading to the current disputes.

Findings of Court:
The court held that deductions granted under specific provisions for banking institutions are predicated on the existence of a valid provision for risks. Once that provision is reversed or transferred to a general reserve, it loses its status as a hedge against bad debts and, having been previously allowed as a deduction, must be brought to tax to prevent double benefits. Furthermore, the court found the revisionary proceedings to be valid and procedurally sound.

Issues: The main issues were whether the transfer of amounts from a bad debt provision account to a general reserve constitutes taxable income, and whether the revisionary order passed under Section 263 was legally sustainable given the procedural challenges raised.

Ratio Decidendi: The court ruled that the write-back of a provision, which was previously allowed as a deduction from taxable income under the relevant section of the Act, constitutes taxable income. The court maintained that provisions created for specific business risks, when no longer required, must be routed through the profit and loss account and taxed accordingly. It further held that mentioning a specific explanation in a revisionary notice is not mandatory if the core issue of inadequate inquiry was clearly communicated to the assessee.

Result: Appeal dismissed.

Table of Content
1. assessment background, grounds of appeal, and dismissal of conceded grounds. (Para 1 , 2 , 3)
2. assessee's argument: reversal of pbdd to reserve is a mere book entry, not taxable income. (Para 4 , 6 , 9)
3. write-back of excess pbdd deduction constitutes taxable income per section 36(1)(viia). (Para 7)

आदेश / O R D E R

Per, Dinesh Mohan Sinha, JM:

Captioned appeal filed by the assessee, pertaining to Assessment Year (AY)-2018-19, is directed against the order passed by the Commissioner of Income Tax Office [(in short “Ld.CIT(A)”] vide order dated 29.12.2023, which in turn assessment order passed by Income Tax Department / Assessing Officer under section 144C(1) of the Income Tax Act, 1961 (in short “the Act”), vide order dated 30.03.2023

2. Grounds of appeal raised by the assessee, are as follows:

1. The learned CIT(A) erred in upholding action of assessing officer in disallowing provision of Rs. 60,00,000/- made for standard asset contingency fund by the Appellant.

2. The Learned CIT(A) erred in treating the amount of Rs. 25,00,00,000/- transferred from bad and doubtful debts provision for rural advances to general reserve during the year, as income for the year.

3. The appellant craves leave to add, amend, alter or withdraw all or any ground of appeal at any time upto the date of hearing of the appeal.

At the outset, Ld. Counsel for the assessee informs the Bench that assessee does not wish to press ground No.1, therefore we dismiss ground No.1, as not pressed.

3. Brief facts of the case that he appellant, Shri Rajkot District Co-operative Bank Limited, is a Cooperative Bank engaged in the business of banking and operates in the districts of Rajkot (Gujarat). The Appellant is assessed to income tax at ACIT, Circle-1(2), Rajkot. The Return of Income for the year relevant to A.Y. 2011-12 was filed on 13.09.2011 showing a net total income of Rs, 11,78,98,647/-. The original assessment order was passed u/s 143(3) by ACIT, Circle-1(2), Rajkot on 04.03.2014 making a disallowance of Rs. 60,00,000 for Provision for Bad & doubtful Debt ('PBDD' for short) claimed on standard assets and assessing the total income at Rs 12,38,98,647/-.

4. During the year relevant to A.Y. 2011-12, the appellant has claimed a deduction of Rs. 60,00,000 u/s 36(1)(viia) as PBDD on Standard Assets and as per regulatory requirement of RBI under IRAC norms it was shown in the books as 'Standard Assets Contingency fund'. The learned Assessing Officer has, without properly appreciating the facts and legislative intent, disallowed the lawful claim for deduction. Transferred a sum of Rs. 25,00,00,000 from accumulated PBDD to SR purely on temporary basis which were reinstated to the source account on 10.02.2015. It was simply a book entry, no real income has accrued or arisen or received by the bank and transfer under consideration is not made exigible to tax under any of the provision of the Income Tax Act.

Further the PBDD created u/s 36(1) (viia) being in the nature of Reserve, such accounting treatment as given in the books was permissible. The learned AO has, without properly appreciating the facts, submission made and legal position, added the same to the returned income stating that "the amount transferred from PBDD to reserve should be first transferred to P&L Account in order to arrive at correct taxable income. The details of claim for PBDD on standard assets as also transfer from PBDD to SR were disclosed in the return of income filed and further submission made during proceeding u/s 143(3) which were not found to be inaccurate by the AO. In light of this facts, there was no case for the AO to allege or to hold the entries under dispute as "furnishing inaccurate particulars of income" so as to invoke provision of Section 271(1)(c).

6. Subsequently, in pursuance of the order u/s 263 dated 21.03.2016 passed by the Principal CIT, Rajkot-1, a fresh order u/s 143(3) r.w.s. 263 was passed on 29.04.2016 assessing the taxable income at Rs. 37,38

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2025 Supreme(Online)(ITAT) 23215

INCOME TAX APPELLATE TRIBUNAL (RAJKOT BENCH)Arjun Lal Saini, Accountant Member, Dinesh Mohan Sinha, Judicial MemberRajkot District Co-operative Bank Ltd. – AppellantVersusDeputy Commissioner of Income-tax – RespondentITA No.196/RJT/2024

When a provision for bad and doubtful debts is claimed and allowed as a deduction under the Act, the subsequent reversal or write-back of such a provision constitutes taxable income, as it represents a recoupment of an amount previously allowed as an expense.

Cases Referred (1)

INCOME TAX APPELLATE TRIBUNAL (RAJKOT BENCH)
Arjun Lal Saini, Accountant Member, Dinesh Mohan Sinha, Judicial Member
Rajkot District Co-operative Bank Ltd. – Appellant
Versus
Deputy Commissioner of Income-tax – Respondent
ITA No.196/RJT/2024