(Prayer in TCA No. 157 of 2014: Appeal filed under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, Madras ‘A’ Bench, dated 05.03.2013 in ITA No. 1495/Mds/2008 for assessment year 2004 – 05.

In TCA No. 158 of 2014: Appeal filed under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, Madras ‘A’ Bench, dated 05.03.2013 in ITA No. 2306/Mds/2008 for assessment year 2005 – 06.

In TCA No. 159 of 2014: Appeal filed under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, Madras ‘A’ Bench, dated 05.03.2013 in ITA No. 393/Mds/2009 for assessment year 2005 – 06.)

Common Judgment:

Dr. Anita Sumanth, J.

1. This common order is passed in T.C.(A) Nos.157, 158 and 159 of 2014 that relate to assessment years (AY) 2004-05 (T.C.(A) No.157 of 2014) and 2005-06 (T.C.(A) Nos.158 and 159 of 2014).

2. The questions raised in T.C.(A) No.157 and 158 of 2014 are common, and as below:

                   1. Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee bank is eligible for deduction of the bad and doubtful debts u/s. 36(1)(vii) and (viia) when the assessee has only debited to the reserve for bad debts only and not actually written off as expenditure to the Profit and Loss account.

                   2. Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in remitting the issue to the file of the Assessing Officer for a fresh decision taking into consideration the decision of the Hon’ble Supreme Court in the case of Catholic Syrian Bank (343 ITR 270) when the assessee has only debited to the serve for bad debts only and not actually written off as expenditure to the Profit and Loss account.

                   3. Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that a Section 115-JB is not applicable to banking company governed by the Banking Regulation Act, 1949?’

3. Both learned counsel accede to the position that the first and second questions of law are covered by the judgment of the Supreme Court in Catholic Syrian Catholic Syrian Bank Ltd. v. Commissioner of Income-tax((343 ITR 270)). The operative portion of the judgment reads as follows:

                   S.H.Kapadia, CJI. - I have gone through the judgment of my esteemed brother Swatanter Kumar, J. and I agree with the conclusions contained therein. However, I would like to give my own reasons.

                   The question for our consideration is - whether on the facts and circumstances of the case, the assessee(s) is eligible for deduction of the bad and doubtful debts actually written off in view of section 36(1)(vii) which limits the deduction allowable under the proviso to the excess over the credit balance made under clause (viia) of Section 36(1) of Income Tax Act, 1961 ("ITA" for short)?

                   2. Under Section 36(1)(vii) of the ITA 1961, the tax payer carrying on business is entitled to a deduction, in the computation of taxable profits, of the amount of any debt which is established to have become a bad debt during the previous year, subject to certain conditions. However, a mere provision for bad and doubtful debt(s) is not allowed as a deduction in the computation of taxable profits. In order to promote rural banking and in order to assist the scheduled commercial banks in making adequate provisions from their current profits to provide for risks in relation to their rural advances, the Finance Act, inserted clause (viia) in sub-section (1) of Section 36 to provide for a deduction, in the computation of taxable profits of all scheduled commercial banks, in respect of provisions made by them for bad and doubtful debt(s) relating to advances made by their rural branches. The deduction is limited to a specified percentage of the aggregate average advances made by the rural branches computed in the manner prescribed by the IT Rules, 1962.

                   Thus, the provisions of clause (viia) of Section 36(1) relating to the deduction on account of the provision for bad and doubtful debt(s) is distinct and independent of the provisions of Section 36(1) (vii) relating to allowance of the bad debt(s). In other words, the scheduled commercial banks would continue to get the full benefit of the write off of the irrecoverable debt(s) under Section 36(1) (vii) in addition to the benefit of deduction for the provision made for bad and doubtful debt(s) under Section 36(1)(viia). A reading of the Circulars issued by CBDT indicates that normally a deduction for bad debt(s) can be allowed only if the debt is written off in the books as bad debt(s). No deduction is allowable in respect of a mere provision for bad and doubtful debt(s). But in the case of rural advances, a deduction would be allowed even in respect of a mere provision without insisting on an actual write off.

                   However, this may result in double allowance in the sense that in respect of same rural advance the bank may get allowance on the basis of clause (viia) and also on the basis of actual write off under clause (vii). This situation is taken care of by the proviso to clause (vii) which limits the allowance on the basis of the actual write off to the excess, if any, of the write off over the amount standing to the credit of the account created under clause (viia). However, the Revenue disputes the position that the proviso to clause (vii) refers only to rural advances. It says that there are no such words in the proviso which indicates that the proviso apply only to rural advances. We find no merit in the objection raised by the Revenue. Firstly, CBDT itself has recognized the position that a bank would be entitled to both the deduction, one under clause (vii) on the basis of actual write off and another, on the basis of clause (viia) in respect of a mere provision. Further, to prevent double deduction, the proviso to clause (vii) was inserted which says that in respect of bad debt(s) arising out of rural advances, the deduction on account of actual write off would be limited to the excess of the amount written off over the amount of the provision allowed under clause (viia). Thus, the proviso to clause (vii) stood introduced in order to protect the Revenue. It would be meaningless to invoke the said proviso where there is no threat of double deduction. In case of rural advances, which are covered by the provisions of clause (viia), there would be no such double deduction. The proviso limits its application to the case of a bank to which clause (viia) applies. Clause (viia) applies only to rural advances. This has been explained by the Circulars issued by CBDT. Thus, the proviso indicates that it is limited in its application to bad debt(s) arising out of rural advances of a bank. It follows that if the amount of bad debt(s) actually written off in the accounts of the bank represents only debt(s) arising out of urban advances, the allowance thereof in the assessment is not affected, controlled or limited in any way by the proviso to clause (vii).

                   3. Accordingly, the above question is answered in the affirmative, i.e., in favour of the assessee(s). For the above reasons, I agree that the appeals filed by the assessees stand allowed and the appeals filed by the Revenue stand dismissed with no order as to costs.….. .

4. We have also considered the above issue in Commissioner of Income Tax v. Karur Vysya Bank Ltd(T.C.(A) Nos.290 of 2010 etc. batch dated 20.02.2026) and applying the ratio of the judgment in Catholic Syrian Bank (supra), have decided the issues in favour of the assessee. Following the same, question Nos.1 and 2 are answered in favour of the assessee and adverse to the revenue.

5. Question No.3 relates to whether the provisions of Section 115JB of the Income Tax Act, 1961 (in short ‘Act’) is applicable to a banking company.

6. The assessee had canvassed the stand that Section 115JB was not applicable to banks prior to amendment by Finance Act, 2012, as per which Section 115JB was specifically made applicable to banks. The Assessing Authority had rejected that contention and an appeal had been filed by the assessee before the Commissioner of Income Tax (Appeals) (in short ‘CIT(A)’).

7. The appeal was dismissed, as against which, ITA 2306/Mds/2008 (AY -05-06) had been filed by the bank before the Income Tax Appellate Tribunal (in short ‘ITAT’/’Tribunal’) that also held adverse to the assessee.

8. We have considered this issue in the case of Commissioner of Income Tax, Chennai vs. Indian Overseas Bank([T.C.A.Nos.151 & 152 of 2014, dated 08.12.2025]), wherein applying the decision of the Karnataka High Court in Commissioner of Income Tax vs. Karnataka Bank Ltd.([(2022) 142 taxmann.com 64 (Kar.)]), we had answered the same in favour of the assessee as follows:

                   3. The operative portion of the judgment in Commissioner of Income-Tax V. Karnataka Bank Ltd. (supra) is as follows:

                   ……..

                   ‘This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the assessee against the order dated 19-01-2018 passed by the Income Tax Appellate Tribunal. The subject matter of the appeal pertains to the Assessment year 2008-2009. The appeal was admitted by a bench of this Court on the following substantial questions of law:

                   1. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in setting aside disallowance made under the head investment portfolio by following earlier decisions which has not reached finality even when the assessing authority rightly made disallowance by holding that irrespective of RBI guidelines were applicable to the assessee for the purposes of the I.T.Act or not, as per the principles of accountancy and the various decisions of Apex Court, income should be recognized in a way which reflects a true and fair picture of the affairs of the assessee and accordingly, when bank itself is treating the securities as "held to maturity", for any reason whatsoever, the same should be the case for purposes of Income Tax as this representation alone reflects the true picture of the accounts of the assessee?

                   2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in setting aside disallowance made under Section 14A read with Rule 8D(2) (ii) and (iii) of the Act on expenditure incurred on earning exempt income even when the assessing authority rightly made disallowances as conditions for making such disallowances were satisfied and assessee failed to show flow of its own funds to those investments from which income is exempt?

                   3. Whether on the facts and in the circumstances of the case, the Tribunal is right in law holding that the assessee-Bank cannot be considered as a Company by following decisions which has not reached finality and even when as per Section 2(17) of the Act, the Company is defined as an Institution, association or body which is or otherwise assessable or assessed as a Company and as such Section 115JB is applicable to assessee Bank for MAT purposes?

                   4. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in setting aside disallowance in setting aside disallowance made under Section 40(a) (ia) of the Act on ATM charges of other Banks even though Section 194H and Explanation to said section is applicable to assessee Bank and as such assessee ought to have deducted TDS on such payments?"

                   2. When the matter was taken up today, the learned counsel for the assessee submitted that the 1st and 3rd substantial questions of law involved in this appeal have already been answered in favour of the assessee by this Court vide judgment dated 16.01.2020 in the case of CIT v. ING Vysya Bank Ltd. reported in [2020] 114 taxmann.com 506/270 Taxman162/422 ITR 116 (Kar.)

                   3. It is further also submitted that the 2nd substantial question of law involved in this appeal also has already been answered in favour of the assessee by this Court vide judgment dated 15.02.2021 in ITA No.133/2015 the case of CIT v. Quest Global Engineering Services(P). Ltd. It is further submitted that the 4th substantial question of law is also answered by a bench of this Court vide Judgment dated 23.11.2020, passed in CIT v. Corporation Bank [2021] 123 taxmann.com 204/277 taxman 207/431 ITR 554 in favour of the assessee and against the revenue.

                   4. The aforesaid submission could not be disputed by the learned counsel for the revenue.

                   5. For the reasons assigned by us in the aforementioned judgments supra the substantial questions of law framed in this appeal are answered in favour of the assessee and against the revenue. In the result, appeal filed by the revenue fails and is hereby dismissed.’

                   4. The matters are presently being consolidated before the Hon’ble Supreme Court and leave has been granted at the instance of the revenue (See Commissioner of Income Tax, LTU V. Vijaya Bank ([2021] 130 taxmann.com 149 (SC)) and Commissioner of Income- Tax V. Karnataka Bank Ltd. ([2022] 142 taxmann.com 65 (SC)).

                   5. In light of the above, the substantial question of law is answered in favour of the assessee.

9. In light of the decision extracted above, the third substantial question of law is answered in favour of the assessee.

10. In T.C.(A) No.159 of 2014, relating to ITA No.393/Mds/2009 (AY 2005-06), the revenue has raised the following question:

                   Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that a Section 115JB is not applicable to banking company governed by the banking regulation act 1949?

11. The above issue had been decided adverse to the assessee by the CIT(A). An alternate contention had then been taken by the assessee relying on the judgment of the Supreme Court in Commissioner of Income Tax v. M/S. HCL Comnet Systems and Services Ltd.((2008) 305 ITR 409 (SC))

12. After a detailed discussion of the matter, the CIT(A) accedes to the alternate contention directing the Assessing Authority to allow the provisions made towards bad debts and investments written off, as deductions in computation of book profits, as according to him it was a loss incurred in the normal course of the business of banking.

13.The revenue thus filed an additional ground in this regard before the Tribunal that came to be rejected as a consequence of the decision in the assessee’s appeal holding MAT provisions to be inapplicable to banking companies.

14. Though some arguments are advanced on the correctness of the alternate submission, there is no necessity to advert to this issue in light of our decision that banking companies stood outside the ambit of Minimum Alternate Tax prior to Finance Act 2012. As this issue is rendered academic, we return the question unanswered.

15. In fine, the above Tax Case (Appeals) are dismissed. No costs. Connected miscellaneous petitions are closed.