Scheduled Commercial Bank Had Utilized Opening Balance In Bad Debts Account To Reduce Total Bad Debts Written Off: Bombay HC Allows Benefit Of Sec 36(1)(Vii)

The High Court held so after finding that the taxpayer had utilized the opening balance in the “bad and doubtful debts account” to reduce the total bad debts written off in claiming the deduction u/s 36(1)(vii).

The Division Bench of Justice G. S. Kulkarni and Justice Somasekhar Sundaresan observed that “It is inconceivable that the amount of bad debts claimed as deduction u/s 36(1)(vii) could have any bearing so as to require any deduction/ subtraction from the provision for bad debts, made by the assessee u/s 36(1)(viia)”. (Para 15)

Facts of the case

The assessee, a scheduled commercial bank having rural branches wrote off total bad debts of Rs. 4.56 Crore which related to the debts arising in the prior period during AY 1993-94 as per Section 36(1)(vii) and subsequently, made fresh provision of Rs. 1.11 Cr at the end of the relevant AY u/s 36(1)(viia). Accordingly, the assessee claimed deduction of Rs. 3.89 Crore. During assessment, the AO held that not only the opening balance in the 'provision account' at the beginning of the year should be taken into account, but also the provision made at the end of the year be reduced, along with bad debt of Rs. 1.11 Crore claimed u/s 36(1)(viia).

On appeal, the CIT(A) held that assessee was required to debit the provisions even in respect of bad and doubtful debts to be written off u/s 36(1)(vii) along with provision for bad debts as u/s 36(1)(viia). Further, the ITAT held that in respect of amount written off by the rural branches, the difference between amount written off and doubtful debts would be allowed.

Observation of the High Court

The Bench observed from a plain reading of Section 36(1)(vii), that a deduction is allowed to Assessee, in computing the income referred to in Section 28, in respect of any bad debt or part thereof which is written off as irrecoverable in the accounts of the Assessee.

The Bench opined that proviso to clause (vii) clearly stipulates that in case of banks to which clause (viia) applies, the amount of the deduction relating to such debt or part thereof exceeds the credit balance in the provision for 'bad and doubtful debt account' made under that clause.

Section 36(1)(viia) permits a deduction qua 'provision' made for bad and doubtful debts not exceeding 5% of the total income, accordingly, Section 36(1)(viia) is a provision distinct and in addition to Section 36(1)(vii) providing for deduction in respect of 'a provision' for bad and doubtful debts made by a scheduled bank, added the Bench.

The Bench further noted that Section 36(1)(2)(v) clearly provides that in making any deduction for bad debt made by a bank to which Section 36(1)(viia) applies, no such deduction shall be allowed unless the bank has debited the amount of such debt in the relevant AY to the provision for bad and doubtful debts made under the said clause.

The Bench found that “Assessee has accounted for the actual bad debts of Rs. 4.56 Cr suffered during the relevant AY, however, the deduction of bad debts claimed under Section 36(1)(vii) is of an amount arrived at after deducting the opening credit balance of the 'bad debt provision', made in the preceding AY from such amount of bad debt written off, which was of Rs. 1.78 Cr from the total bad debts written off, resulting into an amount of Rs. 2.78 Cr as bad debt claimed as deduction under Section 36(1)(vii)”.

Since the same pattern was followed in the subsequent AY also, thus, there is not infirmity in claiming deduction of both Section 36(1)(vii) and Section 36(1)(viia) in the manner as done by the Assessee, added the Bench.

Therefore, remarking that the assessee had not exceeded the deduction beyond the limits by which the bad debts or part thereof exceeds the credit balance in the provision for bad & doubtful debts account made u/s 36(1)(viia), the High Court allowed assessee's appeal.

Counsel for Petitioner/ Assessee: Mihir Naniwadekar and Ruturaj H. Gurjar

Counsel for Respondent/ Revenue: Subir Kumar and Abhinav Palsikar

Case Title: Industrial Development Bank of India versus DCIT

Case Number: Income Tax Appeal No. 511 OF 2004

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