In the case of State Bank of India[1] (Taxpayer), the Special Bench (SB) of the Mumbai Income Tax Appellate Tribunal (Tribunal) was concerned with interpretation of Rule 6ABA of the Income-tax Rules. This rule provides the methodology of computing quantum of aggregate average advances made by the rural branches of a scheduled bank for the purposes of allowing deduction in respect of provision for bad and doubtful debts made up to 10% of such advances.
The Taxpayer-bank claimed deduction by taking into consideration the outstanding balances of the advances at the end of previous months i.e., the opening balances. The tax authority rejected such claim on the basis that only incremental advances made during the month can be considered for the purpose of such calculation.
The first appellate authority upheld the tax authority’s view. Aggrieved, the Taxpayer appealed to the Division Bench of the Tribunal and relied upon the three earlier decisions of Division Bench[2] in taxpayers’ favor. However, the Division Bench in Taxpayer’s case disagreed with the view adopted by coordinate Division Benches and referred the issue to the SB.
The question before the SB was whether the aggregate average advances as per Rule 6ABA is to be computed vis-à-vis total outstanding advances, including opening balances, upon which the Taxpayer has already claimed deduction in earlier years or it is to be computed vis-à-vis the incremental advances made during the year.
Before the SB, the Taxpayer relied upon Calcutta High Court (HC) ruling in the case of PCIT vs. Uttarbanga Kshetriya Gramin Bank[3] and Madras HC ruling in CIT vs. City Union Bank Ltd[4] . Both rulings held that the amount is to be computed vis-à-vis the total outstanding advances, including the opening balances.
In the absence of a contradictory view by any other HC, the SB held that as a matter of judicial propriety; it was bound to follow the view expressed by non-jurisdictional HCs. The SB relied on the Supreme Court (SC) ruling in the case of ACCE vs. Dunlop India Ltd[5]. where the SC held that it is necessary for lower courts to accept loyally the decision of higher courts. Hence, the SB ruled in the favor of the Taxpayer and held that deduction of provision of bad debts would be calculated on the total outstanding advances at the end of each month considering the opening balances.
