I.T.A. No. 490/Ahd/2012 Assessment year: 2008-09 Page 1 of 6 IN INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH, AHMEDABAD [Coram: Pramod Kumar AM and S S Godara JM] I.T.A. No.490/Ahd/2012 Assessment year: 2008-09 Gujarat State Co-op Bank Limited Appellant Sahakar Bhavan, Relief Road, Ahmedabad 380 001. [PAN: AAAAT 9774 T] Vs. Dy. Commissioner of Income Tax, Circle-2, Ahmedabad. Respondent Appearances by: S.N. Soparkar for appellant D.P. Gupta for respondent Date of concluding hearing : 20.07.2016 Date of pronouncing order : 19.10.2016 ORDER Per Pramod Kumar, AM: 1. By way of this appeal, assessee appellant has challenged correctness of order dated 25th January, 2012 passed by learned CIT(A), in matter of assessment under section 143(3) of Income Tax Act, 1961 ( Act hereinafter), for assessment year 2008-09 2. Grievances raised by assessee are as follows :- 1) On facts & in circumstances of case, your appellant most respectfully submits that Ld. Assessing Officer has erred in law in disallowing claim of Bad Debts of Rs.11,72,22,554/- and Hon ble CIT(A) has further erred in law in continuing such disallowance claim of Bad Debts of Rs.11,72,22,554/- without appreciating full facts, and details submitted on record and explained during course of hearing, that borrowers A/cs I.T.A. No. 490/Ahd/2012 Assessment year: 2008-09 Page 2 of 6 are credited by debiting Bad & Doubtful Debts Reserve A/c, and no amounts remain outstanding receivable in borrowers A/c. 2) Your appellant most respectfully submits that Ld. Assessing Officer has erred in law in making addition of Rs.10 Crores in respect of excess provision of interest payable written back, which were already disallowed and added in statement of total income in A.Y. 2004-05 Rs.8 Crores and in A.Y. 1998-99 Rs.2 Crores and Hon ble CIT(A) has further erred in law in continuing such addition of Rs.10 Crores, without appreciating full facts, and details submitted on record and explained during course of hearing. 3. To adjudicate on this appeal, only few material facts need to be taken note of. assessee before us is engaged in banking business. During course of assessment proceedings, Assessing Officer noticed that assessee has claimed deduction for bad debts, amounting to Rs.11,72,22,554/-. In statement of computation of income, it was stated by assessee that out of total bad debts of Rs.15,35,10,531/-, amount of Rs.3,62,87,977/- was already claimed, and balance Rs.11,72,22,554/- be allowed now. However, Assessing Officer did not allow same on ground that amount has not been written off and that bad debt is not routed through profit and loss account. As regards addition of Rs.10 crores on account of excess provision written back, it was made by Assessing Officer with his rather cryptic observations as follows : - 5. Excess provision written back :- assessee has reduced Rs.10,00,00,000/- (Rs. Ten Crores) from its profits in statement of income claiming that excess provision had been made in preceding years. methodology of such abrupt and arbitrary reduction of income is illogical to core. mercantile system of accounting calls for determination of profit on due basis. Also, each year of account is distinct for determination of profit under Taxation Laws. Simply because there was excess provisions made in any preceding year, profit of current year cannot be reduced. Hence, write back becomes irrelevant for computation of income for this year. write back is denied and impugned amount of Rs.10,00,00,000/- is added back to returned income. I . T . . N o. 4 9 0 / h d/ 2 0 1 2 s s e s s m e nt y e r : 2 0 0 8 - 0 9 Page 3 of 6 4. Aggrieved, assessee carried matter in appeal before learned CIT(A) but without any success. Learned CIT(A) upheld action of Assessing Officer, and observed, inter alia, as follows :- 2.3 I have considered facts of case; assessment order and appellant s submission. It is not in dispute that appellant did not write-off bad debts in P&L account. bad debts were debited to bad debts reserve account which is nothing but provision for bad debts account. Assessing Officer disallowed claim on ground that amount was not written-off in P&L account but adjusted against provision for bad debts. This means appellant had substantial credit balance in provision for bad and doubtful debt account and as such bad debts did not exceed credit balance in provision for bad and doubtful debts account. proviso to section 36(1)(vii) does not allow bad debts if it does not exceed credit balance of provision for bad and doubtful debts account. relevant provision is quoted below- Provided that in case of [an assessee] to which clause (viia) applies, amount of deduction relating to any such debt or part thereof shall be limited to amount by which such debt or part thereof exceeds credit balance in provision for bad and doubtful debts account made under that clause.] It is not in dispute that appellant is co-operative bank to which clause (viia) is applicable and therefore bad debts can be allowed only if same exceeds credit balance of provision for bad and doubtful debts account. Since appellant has debited bad debts reserve account by amount of bad debts, same did not exceed credit balance and therefore bad debts are not allowable. Therefore apart from arguments taken by assessing officer in not allowing claim of bad debts, appellant's claim of bad debts is not allowable even as per this provision. Accordingly disallowance made by AO is confirmed. 3.3 I have considered facts of case; assessment order and appellant's submission. Assessing officer did not allow reduction of interest provision reversed by appellant on ground that same is revenue in nature and cessation of liability. Appellant submitted that it did not claim interest expenses in relevant years and therefore reversal of unclaimed expenses cannot be taxable. It is not in dispute that till assessment year 2006-07, appellant's income from business of banking was exempt under section 80 P and therefore claiming that such interest was added in computation is really not relevant. It is not in dispute that interest expenses claimed in P&L account of respective years and therefore it is presumed that profit of those years were reduced by interest amount. Since appellant s income from banking business was exempt in these years, it is immaterial whether interest claimed in P&L account is added I . T . . N o. 4 9 0 / h d/ 2 0 1 2 s s e s s m e nt y e r : 2 0 0 8 - 0 9 Page 4 of 6 in computation and again claimed as deduction. Considering these facts, reversal of interest expenses is income under section 41(1) of Income Tax Act. Accordingly addition made by Assessing Officer is confirmed. 5. assessee is not satisfied and is in further appeal before us. 6. We have heard rival contentions, perused material on record and duly considered facts of case in light of applicable legal position. 7. We find that so far as action of declining deduction of Rs.11,72,22,554/- is concerned, it is based on erroneous reading of Hon ble Supreme Court s judgement in case of TRF Limited vs. CIT [(2010) 323 ITR 397 (SC)]. What this decision holds is that it is not necessary for assessee to establish that debt, in fact, has become bad and that it is enough if bad debt is written off as irrecoverable in books of assessee . requirement for write off by debit to profit and loss account in year of claim does not exist. In present case, debt has been written off in sense that account of debtor is squared up by crediting debtor and debiting bad debt reserve account. This accounting treatment, in our considered view, does amount to actual writ off of debit. However, since this entry does not touch upon profit and loss account at this stage directly, authorities below have declined to treat it as write off of debts. What is overlooked in process is that provision, which is partially squared up in this year to credit of debtor, was created in earlier years to debit of profit and loss account but added back as provision is not tax deductible. As regards learned CIT(A) s reference to proviso to section 36(1)(vii), which, in turns, refers to section 36(1)(viia), to provisions made under section 36(1)(viia) which admittedly is not case here. In view of these discussions, as also bearing in mind entirety of I . T . . N o. 4 9 0 / h d/ 2 0 1 2 s s e s s m e nt y e r : 2 0 0 8 - 0 9 Page 5 of 6 case, grievance of assessee must be upheld. Accordingly, disallowance of deduction for bad debts, amounting to Rs.11,72,22,554/-, is deleted. 8. Ground no.1 is thus allowed. 9. As regard addition of Rs.10 Crores, on account of provision written back, we have noted that leaned CIT(A) has justified same by observing that considering these facts, reversal of interest expense is income under section 41(1) of Income Tax Act but then section 41(1) comes into play only when allowance or deduction has been made in assessment for any year in respect of loss, expenditure or trading liability incurred by assessee. In case before us, provision was never claimed as deduction as it was added back in computation of income. Clearly, section 41(1) has no application in matter. When provision was never claimed as deduction, there cannot be any occasion to bring to tax reversal of such provision. entire exercise of creating this provision, and reversing same partly or fully, is completely tax neutral. fact that income was eligible for deduction under section 80P, even if that be so, is wholly irrelevant in this context. In view of these discussions, we uphold grievance of assessee. Accordingly, this addition of Rs.10 crores also stands deleted. 10. Ground no.2 is also allowed. 11 In result, appeal is allowed. Pronounced in open court today on 19th day of October, 2016. Sd/- Sd/- S S Godara Pramod Kumar (Judicial Member) (Accountant Member) Dated: 19th day of October, 2016. I.T.A. No. 490/Ahd/2012 Assessment year: 2008-09 Page 6 of 6 Copies to: (1) appellant (2) respondent (3) Commissioner (4) CIT(A) (5) Departmental Representative (6) Guard File By order Assistant Registrar Income Tax Appellate Tribunal Ahmedabad benches, Ahmedabad Gujarat State Co-Op Bank Limited v. Dy. Commissioner of Income-tax, Circle-2, Ahmedabad