The Bombay High Court has allowed income tax deduction to Industrial Development Bank of India (IDBI Bank) on bad and doubtful debts.
The bench of Justice G. S. Kulkarni and Justice Somasekhar Sundaresan has observed that under Section 36(1)(vii) of the Income Tax Act any bad debt written off as irrecoverable in the accounts of the assessee is allowable deduction.
Proviso to Section 36(1) (vii) provides that in the case of an assessee to which clause (viia) of Section 36(1) applies, the deduction under Section 36(1)(vii) shall be limited to the bad debt that exceeds the credit balance in the provision of bad and doubtful debts account maintained under Section 36(1)(viia) of the Income Tax Act.
The bench observed that under clause (b) of Section 36(1)(viia), the assessee is entitled to a deduction in respect of any provision made for bad and doubtful debts, to the extent, not exceeding 5% of the total income computed before making any deduction under clause (viia) of Section 36(1) and Chapter VIA of the Income Tax Act.
Background
The appellant-assessee, IDBI Bank is stated to be a Scheduled Commercial Bank, which has rural branches as defined in clause (ia) of Explanation to Section 36(1) (viia) of the Income-tax Act. The assessee follows the practice of writing off in its books of accounts, bad debts during the course of the year as well as making provisions on the last day of the accounting year.
The provision that may be made under Section 36(1)(viia) is a percentage of the total income and another percentage of the advances made during the year, which necessarily means that it can only be computed at the end of the year. For the assessment year in question (AY 1993-94), the accounting year ended on 31 March, 1993. It is stated that there was opening balance as on 1 April, 1992 in the provision account made as per Section 36(1)(viia) of the Act, which permits the assessee to make a ‘provision’ for bad debts.
The assessee actually wrote off total bad debts which related to the debts arising in the prior years. The assessee contended that at the end of the year, i.e., on 31 March, 1993, the assessee made fresh provision and claimed deduction under section 36(1)(viia).
In assessing the income of the assessee, in the context of the deductions on this count as claimed by the assessee, the Assessing Officer was of the view 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 debts being an amount of Rs.1,11,79,936/- and allowed only the balance amount of bad debts.
The assessee carried the matter to CIT(A) who concurred with the views of the Assessing Officer to hold that the assessee was required to debit the provisions even in respect of the amounts of bad and doubtful debts to be written off under section 36(1)(vii) along with provision for bad debts as made under section 36(1)(viia). The assessee hence carried an appeal to the Tribunal contending that the provisions of Section 36(1)(vii) and 36(1)(viia) were independent and contemplated avoidance of double deduction in respect of the same amount. It was contended that these being two separate deductions, one cannot be curtailed by the other.
The tribunal rejected the appeal of the assessee.
Arguments
The assessee contended that the provisions of Section 36(1)(vii) and Section 36(1)(viia) are independent of each other, which permits the assessee to have a separate deduction of the amount of bad debts under clause (vii) as also to have a provision for bad debts under clause (viia) of Section 36(1), in terms of the formula stipulated therein.
The assessee contended that Tribunal has in fact failed to given cogent reasons, on the case as made out by the assessee in its appeal in assailing the findings as recorded by the Assessing officer, as also confirmed by the CIT(A).
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Conclusion
The court held that the deduction on account of provision for bad and doubtful debts is distinct and independent of the provisions of section 36(1)(vii) relating to allowance of the bad debts.
The court while allowing the appeal held that the assessee was entitled for the deductions under clauses (vii) and (viia) of Section 36(1) of the Act for the assessment years in question.
Case Title: IDBI Vs. DCIT
Case No.: Income Tax Appeal No. 511 Of 2004
Date: 19/09/2024
Counsel For Appellant: Mihir Naniwadekar
Counsel For Respondent: Subir Kumar
