1. This appeal by the assessee is directed against the order of the Commissioner (Appeals) dated 12-4-1983 relating to the assessment year 1979-80. The only issue for my determination in this appeal is whether on the facts and in the circumstances of the case, the Commissioner (Appeals) erred in confirming the addition of Rs. 30,000 debited to the books of account of the assessee under the head provision for bad and doubtful debts. For the determination of this issue, the facts which are relevant and have to be taken into consideration lie in a narrow compass as under.
2. The assessee is admittedly a co-operative society having the business of banking. In other words, it is a banking co-operative society and the income from this business of the assessee is exempt under section 80P (2) (a) (i) of the Income-tax Act, 1961 (the Act).
During the previous year which ended on 30-6-1978, the assessee debited to its account a sum of Rs. 30,000 as provision for loss from bad and doubtful debts. When the assessment was taken up by the ITO, he added back this sum in computing the taxable total income of the assessee as the assessee had income from miscellaneous receipt shown in the profit and loss account at Rs. 711. The addition made by the ITO was on the ground that,this being a reserve and the debts not not actually being a reserve and the bets not actually being written off during the year under consideration, this provision for bad and doubtful debts cannot be allowed. There are some other additions but in this appeal they are not in dispute and for determination.
3. When the matter came up in appeal before the Commissioner (Appeal), he confirmed the order of the ITO by supporting the action of the ITO with the further reasoning the no attempt has been made to prove the bad debts even before the ITO. The argument that this could be income from banking does not help the appellant as the bad debt have not been proved. The assessee has, therefore, felt aggrieved and has come up in appeal before the Tribunal.
4. The learned counsel for the assessee submitted that it is accepted by the revenue that the assessee is a banking co-operative society and its income as such is exempt under section 80P (2) (a) (i). These debts for which provision has been made are in the ordinary course of banking business of the assessee. The provision that was made, therefore, even it disallowed for purposes of computation of income has to be related to that activity of the assessee income from which is exempt.
Therefore, the ITO erred in addition Rs. 30,000 to the taxable receipt of the assessee and the learned Commissioner (Appeals) erred in supporting him.
5. On the other hand, the learned departmental representative contended that this is a case where the assessee has to prove that it is engaged in carrying on the business from which the income is exempt and since there are heads of income other than the income which is exempt, he disallowance made by the authorities below and added to the the taxable income has full justification in view of the judgment of the Andhra Pradesh High Court in the case of Andhra Pradesh Co-operative Central Land Mortgage Bank Ltd. v. CIT  100 ITR 472.
6. After careful consideration of the rival submissions and on perusal of the authority cited on behalf of the revenue, I find no justification for what has been done by the authorities below. The reasons for this are basically factual and not for to seek. The ITO has accepted that this is the case of a banking co-operative society because out of the net income of Rs. 24,16,745 as shown in the profit and loss account for the year ending 30-6-1978, he has picked out taxable income of Rs. 711 shown under the head other receipts, with the sub-head of miscellaneous income. Now while computing the total income starting from this sum of Rs. 711, he has added profit on sale of books amounting to Rs. 3,370, locker rent of Rs. 3,185, income from refunds received Rs. 926, etc. He has also added dividend income and depreciation for separate consideration. In doing this computation, he has added Rs. 30,000 on the ground that it is a reserve. But it is clear that the assessee had debited this sum apparently against its receipts from interest and discount and commission on exchange and brokerage. The receipts from interest and discount and commission of exchange and brokers. The receipts from interest and discount are Rs. 1,59,21,667. The receipts from commission, etc., are Rs. 23,894. It is, therefore, apparent that the debit to the accounts made by the assessee by way of a provision for bad and doubtful debts had direct and proximate connection with or nexus to earning that income of the assessee which is exempt under section 80P (2) (a) (i). The ITO failed to appreciate this aspect of the matter when when he added back Rs. 30,000 in the computation of income from sources other than banking activity of the assessee which were taxable. The amount, therefore, by way of disallowance could not be converted from one which is having close connection and nexus with the business activity of the assessee which is exempt under section 80P (2) (a) (i). The whole process has been, it may be said, done inversely.
7. The reliance placed by the revenue on the judgment of the Andhra Pradesh High Court in Andhra Pradesh Co-operative Central Land Mortgage Bank Ltd.s case (supra) is of no avail because there is dispute by the ITO that the assessee is in fact carrying on the business of a banking co-operative society and has in fact exempt income which emanated from such an activity. It has also been shown that the debit of Rs. 30,000 could not be related to or against the income from other receipts, i.e.
the head from which the income is to exempt from tax. |Therefore, factually there is no case for addition Rs. 30,000 to the income which is taxable. The order of the authorities below are, therefore, set aside and the ITO is directed to delete this sum of Rs. 30,000 from the taxable income of the assessee.