1 itxa5758-10 agk IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.5758 OF 2010 The Director of Income Tax (International Taxation) Room No.107, Scindia House, Ballard Estate, Mumbai – 400 038 ..Appellant. Versus M/s.Citi Bank NA 5th Floor, C-61, Bandra Kurla Complex, G Block, Bandra (East), Mumbai 400 051 ..Respondent. Mr.Suresh Kumar for the appellant. Mr.P.J. Pardiwala, Senior Advocate with Mr.B.D. Damodar i/by Kanga & Co. for the respondent. CORAM : J.P. Devadhar & A.R. Joshi, JJ. DATE : 22nd December 2011 ORAL JUDGMENT : (Per J.P. Devadhar, J.) 1. The question of law raised by the Revenue in this appeal reads thus :- 2 itxa5758-10 “Whether, on the facts and circumstances of the case and in law, the Income Tax Appellate Tribunal was right in providing the relief of Rs.3,57,34,509/- under Section 36(1)(viia) of the Act which is far in excess 5% of the total income assessed after appeal effect at Rs.5,20,86,28,184/- without appreciating the fact that the deduction as per Section 36(1) (viia) of the Act is to be limited to 5% of the gross total income ?” 2. The assessee is a banking company incorporated in USA. In the previous year relevant to the assessment year 2000-01, the assessee had written off bad debts in its books of account amounting to Rs.52.36 crores and had made provision for bad doubtful debts aggregating to Rs. 34,61,58,000/-. The opening credit balance in the provision for bad and doubtful debts account was Rs.2 crores which according to the assessee was allowable in the assessment year 1999-2000. 3. In the return of income filed for AY 2000-01, the assessee claimed deduction of bad debts under Section 36(1)(vii) at Rs. 50,36,39,689/- and deduction of provisions for bad and doubtful debts under Section 36(1)(viia) at Rs.26,01,36,049/-. The said sum of Rs.50,36,39,389/- was arrived at by reducing from the bad debts of Rs.52,36,39,689/- written off, a sum of Rs.2 crores which was the deduction under Section 36(1)(viia) claimed by the assessee for AY 1999-2000. The deduction under Section 36(1)(viia) at Rs.26,01,36,049/- was worked out at 5% of the adjusted total income. 4. In the assessment order passed on 20th March 2002, the 3 itxa5758-10 assessing officer made several dis-allowances as a result whereof, the total income went up and consequently the deduction at 5% of the assessed total income under Section 36(1)(viia) was computed at Rs.30,82,06,745/- as against Rs.26,01,36,049/- claimed by the assessee. The assessing officer deducted the closing provision for bad and doubtful debts of Rs. 30,82,06,475/- determined under Section 36(1)(viia) while calculating the bad debts allowable under Section 36(1)(vii) of the Act. 5. Challenging the assessment order, the assessee filed an appeal before the Commissioner of Income Tax (A). By an order dated 26th July 2004, the Commissioner of Income Tax (A) deleted various dis-allowances made by the assessing officer. As regards the allowance of bad debts is concerned, the Commissioner of Income Tax (A) upheld the stand taken by the assessing officer that in terms of the proviso to Section 36(1)(vii), the bad debts written off during the year have to be adjusted by the closing provision for bad debts and not the opening provision for bad debts. 6. While giving effect to the order of the Commissioner of Income Tax (A) on 29th March 2005, the assessing officer recomputed the deduction allowable under Section 36(1)(viia), as the total income stood reduced on account of deletion of various dis-allowances by the Commissioner of Income Tax (A). Accordingly, after giving effect to the order of the Commissioner of Income Tax (A), the deduction under Section 36(1)(viia) was computed at Rs.27,41,63,404/- instead of Rs.30,82,06,745/- as originally computed. The 4 itxa5758-10 differential amount was thus neither allowed under Section 36(1)(vii) nor under Section 36(1)(viia) of the Act. 7. Challenging the order of the assessing officer dated 29th March 2005, the assessee filed an appeal before the Commissioner of Income Tax (A) who allowed the claim of the assessee by enhancing the deduction under Section 36(1)(vii) to the extent the deduction that has been reduced under Section 36(1)(viia) of the Act. Challenging the order of the Commissioner of Income Tax (A), the Revenue had filed an appeal which was dismissed by the Income Tax Appellate Tribunal on 5th August 2009. The present appeal is filed to challenge the order of the Income Tax Appellate Tribunal dated 5th August 2009. 8. It is the contention of the Revenue that once the assessment order is modified by reducing the deduction allowed under Section 36(1) (viia) (at 5% of the total income) from Rs.30,82,06,745/- to Rs. 27,41,63,404/-, then the amount so reduced could not be allowed as deduction as it would amount to allowing deduction in excess of 5% of the total income under Section 36(1)(viia)(b) of the Act, which is not permissible in law. 9. On behalf of the assessee, it is, however, contended that in the present case, it is not in dispute that the total deduction allowable on account of writing off of the bad debts is Rs.52.36 crores. It is contended that the 5 itxa5758-10 assessee being eligible for deduction under Section 36(1)(vii) and 36(1) (viia), the total deduction under these provisions could not exceed Rs.52.36 crores. As the deduction under Section 36(1)(viia) was originally computed at Rs.30,82,06,745/-, the balance amount was allowable under Section 36(1) (vii). In view of the order of the Commissioner of Income Tax (A), the total income stood reduced and consequently deduction under Section 36(1)(viia) stood reduced at Rs.27,41,63,404/-. It is contended that since Rs. 27,41,63,404/- out of Rs.52.36 crores is allowable under Section 36(1)(viia), the balance amount has been correctly allowed under Section 36(1)(vii) of the Act. 10. Before dealing with the rival contentions, we may quote the provisions of Section 36 of the Act, to the extent relevant herein : “Other deductions. 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) --------- (ii) --------- (iii) --------- (iv) --------- (v) --------- (vi) --------- (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 (viia) 6 itxa5758-10 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. Explanation. - For the purpose of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee; (viia) in respect of any provision for bad and doubtful debts made by - (a) ------ (b) a bank, being a bank incorporated by or under the laws of a country outside India, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VIA); (c) ------” 11. Section 36 of the Act, thus, provides that where an assessee in the previous year writes off any debt as irrecoverable in the books of accounts maintained by it, then, subject to the proviso to Section 36(1)(vii) and Section 36(2) of the Act, the entire amount written off is allowable as deduction under Section 36(1)(vii) of the Act. The proviso to Section 36(1) (vii) inserted by Finance Act, 1985 with effect from 1st April 1985 provides that in the case of an assessee to which clause (viia) applies, the deduction in relation to such debt shall be limited to the amount by which such debt exceeds the credit balance in the provision for bad and doubtful debts made under clause (viia) to Section 36(1) of the Act. 7 itxa5758-10 12. The first question to be considered herein is, whether the expression ‘credit balance’ in the proviso to Section 36(1)(vii) is relatable to the opening credit balance in the provision for bad and doubtful debts account as on 1st April of the relevant accounting year or the closing credit balance as on 31st March of the relevant accounting year. In view of the Boards’ Instruction No.17/2008 dated 26th November 2008, it is clear that the expression ‘credit balance’ in the proviso to Section 36(1)(vii) is relatable to the opening credit balance in the provision for bad and doubtful debts account i.e. the balance brought forward as on 1st day of April of the relevant accounting year. 13. The question then to be considered is, whether the deduction allowed in the present case under Section 36(1)(vii) and under Section 36(1) (viia) exceed the limits prescribed under the respective sections ? Under Section 36(1)(vii) of the Act any bad debt written off as irrecoverable in the accounts of the assessee is allowable deduction. Proviso to Section 36(1)(vii) provides that in the case of an assessee to which clause (viia) of Section 36(1) applies, the deduction under Section 36(1)(vii) shall be limited to the bad debt that exceeds the credit balance in the provision of bad and doubtful debts account maintained under Section 36(1)(viia) of the Act. It is not in dispute that the assessee is a bank incorporated by or under the laws of a country outside India. Therefore, under clause (b) of Section 36(1)(viia), the assessee is entitled to a deduction in respect of any provision made for bad 8 itxa5758-10 and doubtful debts, to the extent, not exceeding five per cent of the total income computed before making any deduction under clause (viia) of Section 36(1) and Chapter VIA of the Act. 14. Admittedly, the opening credit balance in the provision for bad and doubtful debts account was Rs.2 crores which according to the assessee was allowable in the assessment year 1999-2000. The lower authorities have not disputed this contention of the assessee. If the above amount of Rs.2 crores is held allowable in the assessment year 1999-2000, then, the opening credit balance in the provision for bad and doubtful debt as on the first day of the accounting year being ‘nil’, the entire amount of Rs.52.36 crores written off would have been allowable under Section 36(1)(vii) of the Act. 15. In the present case, pursuant to the order in appeal, the total income stood reduced and consequently the deduction under Section 36(1) (viia) originally computed at Rs.30.82 crores was computed at Rs.27.41 crores. If the amount of Rs.27.41crores was treated as the opening credit balance in the provision for bad and doubtful debts account, then, as per the proviso to Section 36(1)(vii), the deduction under Section 36(1)(vii) out of the amount of Rs.52.36 crores had to be limited to the amount that exceeds Rs.27.41 crores. In other words, out of the overall deduction of Rs.52.36 crores allowable on account of bad debts written off, if Rs.27.41 crores was treated as the opening credit balance in the provision for bad and doubtful debts account maintained by the assessee, then as per the proviso to Section 9 itxa5758-10 36(1)(vii), the deduction under Section 36(1)(vii) would be limited to the amount that exceeds Rs.27.41 crores. 16. The argument of the Revenue that if the decision of the Tribunal is accepted, then, it would amount to allowing deduction in excess of 5% of the total income under Section 36(1)(viia) of the Act is without any merit, because, by the impugned decision the deduction under Section 36(1)(viia) is maintained at 5% of the total income, that is, at Rs.27.41 crores. It is only the deduction under Section 36(1)(vii) is varied on account of the variation in the deduction allowed under Section 36(1)(viia) of the Act. 17. For the aforesaid reasons, the decision of the Tribunal in holding that out of the bad debts written off in the assessment year in question amounting to Rs.52.36 crores, if Rs.27.41 crores (at 5% of the total income) is allowed under Section 36(1)(viia), then, the amount exceeding Rs.27.41 crores has to be allowed under Section 36(1)(vii) of the Act cannot be faulted. 18. In the result, the appeal filed by the Revenue fails and the same is hereby dismissed with no order as to costs. (A.R. Joshi, J.) (J.P. Devadhar, J.)