N.N. Mathur J.
1. This appeal under Section 260A of the Income-tax Act, 1961, is directed against the order dated February 28, 2000, passed by the Income-tax Appellate Tribunal, Jodhpur Bench, whereby the Tribunal allowed the claim of the assessee for deduction of Rs. 7,88,848 with respect to the bad debt for the assessment year 1987-88.
2. This court admitted the appeal on the following question of law :
'Whether after the Finance Act, 1985, amending the provisions of Section 36(l)(vii) and Section 36(2) with effect from April 1,1985, inserting a proviso to Section 36(l)(vii) and Clause (v) to Section 36(2), claims under sections 36(l)(vii) and 36(l)(viia) are separate and distinct ?'
3. Briefly stated the facts of the case are that the respondent-assessee, the Bank of Rajasthan Ltd., is a scheduled bank governed by the provisions of the Banking Regulation Act, 1949. The Assessing Officer assessed the income of the respondent-assessee for the assessment year 1985-86 on the income of Rs. 17,78,882 and for the assessment year 1986-87 for Rs. 1,50,04,051. The Assessing Officer allowed the deduction under Section 36(l)(viia) to the tune of Rs. 34,82,940 for the assessment year 1985-86 and Rs. 38,77,230 for the assessment year 1986-87 with respect to bad and doubtful debts on advances made by its rural branches. The assessee was also allowed deduction under Section 36(l)(vii) on account of bad debts written off amounting to Rs. 6,350 and Rs. 2,12,488. On appeal, the Commissioner of Income-tax (Appeals) wasof the view that the original assessments for the assessment years 1985-86 and 1986-87 were prejudicial to the interests of the Revenue with respect to the deduction of bad debts as it was done without verifying the deduction for the bad debts claimed in respect of the urban branches without examining the question as to whether the assessee was entitled to deductions under Section 36(l)(vii) in addition to the deduction allowed in respect of the provision for bad and doubtful debts under Section 36(l)(vii). Accordingly, the Commissioner of Income-tax (Appeals) directed the Assessing Officer to undertake de novo assessment after verification of the fact that bad debts relate to urban branches and not to rural advances. The Assessing Officer after verification of the fact found that the claim of bad debt made by the assessee for the years 1985-86 and 1986-87 undertion 36(l)(vii) pertained to urban branches and not rural branches. The Commissioner of Income-tax (Appeals) again remitted the matter to the Assessing Officer in view of the amendments made in Sections 36(l)(vii) and 36(l)(vii) with effect from April 1, 1985/April 1, 1987, for de novo completion of assessment after examining the amended provisions. The Assessing Officer disallowed the claim of the assessee regarding deduction of Rs. 7,88,848 as bad debt for the assessment year 1986-87 on the ground that the claim was premature. The assessee again made a fresh claim for the said amount during the assessment year 1987-88 because certain subsequent events took place in the assessment year 1987-88 which showed that the debt became bad and irrecoverable in the assessment year 1987-88. The said order was confirmed in appeal by the Commissioner of Income-tax (Appeals). The Income-tax Appellate Tribunal found that the amount outstanding against J.R. Exports had been written off in the books of account relating to the assessment year 1986-87. This amount was not shown as outstanding in the books of account of the assessee-bank at the commencement of the relevant accounting year nor was it outstanding at the end of the relevant accounting year pertaining to the assessment year 1986-87. In the opinion of the Tribunal bad debts amounting to Rs. 7,88,847 were claimed as deduction under Section 36(l)(vii) in the assessment year 1986-87 which was disallowed on the ground that it was a premature claim. Subsequent events proved that the debt was found to be irrecoverable. The Tribunal also noticed the correspondence of the assessee-bank with Kanga and Co., Advocates and Solicitors of Bombay. Kanga and Co. by letter dated November 24, 1986, opined that since the debtor has been declared insolvent, no useful purpose will be served by pursuing the suit any further. It was also found that J.R. Exports, a proprietorship firm of Shri J.R. Motwani, started dealing with the FED Bombay Branch of the appellant-bank in the year 1973. The bank had given advances and due was for a sum of Rs. 10,38,067.70. Sums of Rs. 1,74,220 and Rs. 75,000 were recovered under EPFG and PSG, respectively. After crediting the said amounts, the balance amount was of Rs. 7,88,847.37. The saidamount was written off as the borrower had been declared insolvent and expired subsequently leaving behind no assets. Thus, the bad debt which was written off in the assessment year 1986-87, the debt became bad and irrecoverable in the assessment year 1987-88. In the opinion of the Tribunal, the assessee-bank was entitled to claim of deduction with respect to the bad debt of Rs. 7,88,847 for the assessment year 1987-88 as it was a premature claim for the assessment year 1986-87.
4. It is contended by Mr. L.M. Lodha that as in the books of account of the assessee the debt in question was written off only in the assessment year 1986-87, it became a bad debt in the previous year relevant to the assessment year 1987-88. As such the respondent-assessee was not entitled to claim benefit and allowances by way of deduction for the assessment year 1987-88 as the proviso to Section 36(l)(vii) applies to the assessee's claim in respect of bad debt. On the other hand, Mr. Rajendra Mehta has supported the judgment of the Tribunal.
5. In order to appreciate the rival contentions, it may be convenient here to extract the relevant provisions, namely, Section 36(l)(vii), (viia) and Section 36(2), Sub-clause (v), as follows :
'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) the amount of any premium paid in respect of insurance against risk of damage or destruction of stocks or stores used for the purposes of the business or profession ; . . .
(vii) subject to the provisions of Sub-section (2), the amount of any debt, or part thereof, which is established to have become a bad debt in the previous year : Provided that in the case of an assessee to which Clause (viia) 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.'
6. The provision as existed during the periods 1985 to 1988 has been inserted by the Finance Act, 1985, with effect from April 1, 1985.
'(viia) in respect of any provision for bad and doubtful debts made by-
(a) a scheduled bank [not being a bank incorporated by or under the laws of a country outside India] or a non-scheduled bank, an amount not exceeding five per cent, of the total income (computed before making any deduction under this clause and Chapter Vl-A) and an amount not exceeding ten per cent, of the aggregate average advance made by the rural branches of such bank computed in the prescribed manner :
Provided that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed in any of the relevant assessment years, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, for an amount not exceeding five per cent, of the amount of such assets shown in the books of account of the bank on the last day of the previous year.
36. (2) In making any deduction for a bad debt or part thereof, the following provisions shall apply :--
(i) no such deduction shall be allowed unless such debt or part thereof-
(a) has been taken into account in computing the income of the asses-see of that previous year or of an earlier previous year, or represents money lent in the ordinary course of business of banking or money-lending which is carried on by the assessee, and
(b) has been written off as irrecoverable in the accounts of the asses-see for that previous year; . . .
(iii) any such debt or part of debt may be deducted if it has already been written off as irrecoverable in the accounts of an earlier previous year being a previous year relevant to the assessment year commencing on the 1st day April, 1988, or any earlier assessment year, but the Assessing Officer had not allowed it to be deducted on the ground that it had not been established to have become a bad debt in that year ; . . .
(v) where such debt or part of debt relates to advances made by a bank to which Clause (viia) of Sub-section (1) applies, no such deduction shall be allowed unless the bank has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause.'
7. Section 36(l)(vii) was introduced by the Income-tax (Amendment) Act, 1986, with a view to provide for grant of deduction in respect of provision for bad debt made by all the banks up to five per cent, of their total income and additional deduction not exceeding two per cent, of the aggregate advances made by rural branches of such banks to be computed in the prescribed manner. Therefore, the provisions of Section 36(l)(vii) with effect from the assessment year 1987-88 granted deduction in respect of provision for bad and doubtful debts both in respect of their total advances including urban and rural advances subject to the limitation and conditions prescribed under the relevant rules. Thus, while Section 36(l)(vii) provides for deduction in the computation of taxable profits of any debt or part thereof, which is established to have become a bad debt in the previous year subject to the fulfilment of the conditions specified in Sub-section (2) of Section 36, Section 36(l)(vii) provides for deduction in respect of any provision for bad and doubtful debt made by a scheduled bank or non-scheduled bank in relation to advances by its rural branches of any amount not exceeding the percentage of the aggregate average advances mentioned in the provision made by such branches. The proviso to Section 36(l)(vii) provides that in the case of a bank--later on the expression was substituted as an assessee in place of the bank--to which the Clause (viia) applies, the amount of deduction relating to the bad debts under Section 36(l)(vii) shall be limited to the amount by which said debt or part thereof exceeds the credit balance in the provisions for bad and doubtful debts account under that clause. It is significant to notice that the language used in the proviso to Section 36(l)(vii) that the amount of deduction relating to any such debt or part thereof under Section 36(l)(vii) 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. The use of the words 'any such debt or part thereof' clearly indicate that the exclusion of the provision in the proviso to Section 36(l)(vii) will apply only in cases, where a provision for bad and doubtful debts has been made in the relevant accounting year on the bad and doubtful debts which were outstanding at the commencement of the relevant accounting year and/or were also outstanding at the end of the relevant year. The aggregate average advances with reference to which the deduction in respect of the provision for bad and doubtful debt can be allowed necessarily implies that such a provision has to be made in respect of the loans and advances made at the end of the year.
8. Thus, it is evident that both the clauses, i.e., Sections 36(l)(vii) and 36(l)(vii), are separate and they are distinct and independent. It is open for an assessee to claim benefit of the provision which enables him a larger benefit. A reference be made to the decisions of the apex court in CIT v. Indian Engineering and Commercial Corporation Pvt. Ltd. : [1993]201ITR723(SC) and CCE v. Indo Petro Chemicals : 1997(92)ELT13(SC) . It is also a known principle in tax law that if the assessee's income falls under two exempting sections, he is entitled to rely on both sections unless they are expressly or by necessary implication made mutually exclusive and he may claim exemption under either of them even if he does not fulfil the conditions of the other.
9. In the instant case, the amount outstanding against J. R. Exports had been written off in the books of account relating to the assessment year 1986-87. This amount was not shown as outstanding in the books of account of the appellant-assessee at the commencement of the relevant accounting year nor was it outstanding at the end of the relevant accounting year pertaining to the assessment year 1987-88. Bad debt amounting to Rs. 7,88,847 was claimed as deduction under Section 36(l)(vii) in the year 1986-87, which was disallowed on the ground that it was a premature claim. Subsequent events as indicated above clearly show that the debt was found to be irrecoverable. The assessee, therefore, rightly claimed deduction in respect of bad debts under Section 36(l)(vii) in respect of that amount, which it had already written off in the books of account pertaining to the assessment year 1986-87. Therefore, theamount of bad debt actually written off in the books of account pertaining to the assessment year 1986-87 cannot be required to be debited against the provision for bad and doubtful debt made in the books of account pertaining to the assessment year 1987-88 with reference to the amount of advances shown as outstanding in the assessment year 1987-88. In view of this, the Tribunal has rightly held that Clause (viia) applies to the amount of bad debt claimed by the assessee in respect of Rs. 7,88,847 written off in the name of account of the assessment year 1986-87. The view also finds support from the illustration as given in the Income-tax law by K. Chaturvedi at page 2021. According to the author if the bad debt is written off in the earlier accounting year and the Assessing Officer had not allowed it in that year and as having been prematurely written off, the Assessing Officer is empowered to allow it in any subsequent year when he satisfies about its irrecoverability.
10. In view of the aforesaid discussion, we find no merit in this appeal and thesame is dismissed. No order as to costs.