IN HIGH COURT OF KARNATAKA AT BANGALORE Dated this 13th day of October, 2014 PRESENT HON'BLE MR. JUSTICE N KUMAR AND HON'BLE MR. JUSTICE B MANOHAR ITA No.1011 of 2008 BETWEEN: 1. Commissioner of Income Tax C. R. Building Queens Road Bangalore 2. Asst. Commissioner of Income Tax Circle-11(2) C. R. Building Queens Road Bangalore Appellants (By Sri K. V. Aravind, Advocate) AND: M/s. Canara Bank H.O. No.112 J. C. Road Bangalore Respondent 2 (By Sri G. Sarangan, Senior Advocate for Sri K.S. Ramabhadran, Advocate) This ITA filed under Section 260-A of I.T. Act, 1961 arising out of order dated 20-06-2008 passed in ITA No.953/Bang/2006, for Assessment year 2004-05, praying to (i) formulate substantial questions of law stated therein; (ii) allow appeal and set aside order passed by ITAT Bangalore in ITA No.953/Bang/2006, dated 20-06-2008 confirming order of Appellate Commissioner and confirm order passed by Assistant Commissioner of Income Tax, Circle-11(2), Bangalore. This ITA coming on for hearing this day, N. KUMAR J delivered following: JUDGMENT revenue has preferred this appeal against order passed by Tribunal. 2. substantial question of law which arise for consideration in this appeal is as under:- Whether appellate authorities were correct in holding that bad debt claim made by assessee which was disallowed by assessing officer was not justified as controversy is caused by judgment of this Hon ble Court in CIT vs. Karnataka Bank in ITA 3 No.480/2003, DD. 19-03-2008, when facts of present case is not identical to that decided by this Hon ble Court. 3. Apex Court in case of CATHOLIC SYRIAN BANK LIMITED vs COMMISSIONER OF INCOME TAX [(2012) 343 ITR 270] dealing with very same question has held as under:- 24. Clear legislative intent of relevant provisions and unambiguous language of circulars with reference to amendments to Section 36 of Act demonstrate that deduction on account of provisions for bad and doubtful debts under Section 36(1)(viia) is distinct and independent of provisions of Section 36(1)(vii) relating to allowance of bad debts. legislative intent was to encourage rural advances and making of provisions for bad debts in relation to such rural branches. Another material aspect of functioning of such banks is that their rural branches were practically treated as distinct business, though ultimately these advances would form part of books of 4 accounts of principal or head office branch. Thus, this Court would be more inclined to give interpretation to these provisions which would serve legislative object and intent, rather than to subvert same. Circulars in question show trend of encouraging rural business and for providing greater deductions. purpose of granting such deductions would stand frustrated if these deductions are implicitly neutralized against other independent deductions specifically provided under provisions of Act. To put it simply, deductions permissible under Section 36(1)(vii) should not be negated by reading into this provision, limitations of Section 36(1)(viia) on reasoning that it will form check against double deduction. To our mind, such approach would be erroneous and not applicable on facts of case in hand. Interpretation and Construction of Relevant Sections 25. language of Section 36(1)(vii) of Act is unambiguous and does not admit of two interpretations. It applies to all banks, commercial or rural, scheduled or unscheduled. It gives 5 benefit to assessee to claim deduction on any bad debt or part thereof, which is written off as irrecoverable in accounts of assessee for previous year. This benefit is subject only to Section 36(2) of Act. It is obligatory upon assessee to prove to assessing officer that case satisfies ingredients of Section 36(1)(vii) on one hand and that it satisfies requirements stated in Section 36(2) of Act on other. proviso to Section 36(1)(vii) does not, in absolute terms, control application of this provision as it comes into operation only when case of assessee is one which falls squarely under Section 36(1)(viia) of Act. We may also notice that explanation to Section 36(1)(vii), introduced by Finance Act, 2001, has to be examined in conjunction with principal section. explanation specifically excluded any provision for bad and doubtful debts made in account of assessee from ambit and scope of `any bad debt, or part thereof, written off as irrecoverable in accounts of assessee'. Thus, concept of making provision for bad and doubtful debts will fall outside scope of Section 36(1)(vii) 6 simplicitor. proviso, as already noticed, will have to be read with provisions of Section 36(1)(viia) of Act. Once bad debt is actually written off as irrecoverable and requirements of Section 36(2) satisfied, then, it will not be permissible to deny such deduction on apprehension of double deduction under provisions of Section 36(1)(viia) and proviso to Section 36(1)(vii). This does not appear to be intention of framers of law. scheduled and non-scheduled commercial banks would continue to get full benefit of write off of irrecoverable debts under Section 36(1)(vii) in addition to 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 case of rural advance, same, in terms of Section 36(1)(viia)(a), may be allowable without insisting on actual write off. 4. In view of said statement of law, substantial question of law framed in this case is answered in favour of assessee and against revenue. In that view of 7 matter, we do not see any merit in this appeal. Accordingly, appeal is dismissed. Sd/- JUDGE Sd/- JUDGE ckl/- Commissioner of Income-tax, Bangalore / Asst. Commissioner of Income-tax Circle-11(2), Bangalore v. Canara Bank