2014 (10) TMI 886 - HC - Income Tax

Bad debt claim disallowed - Held that - The proviso to Section 36(1)(vii) does not in absolute terms control the application of this provision as it comes into operation only when the case of the assessee is one which falls squarely under Section 36(1)(viia) of the Act. We may also notice that the explanation to Section 36(1)(vii) introduced by the Finance Act 2001 has to be examined in conjunction with the principal section. The explanation specifically excluded any provision for bad and doubtful debts made in the account of the assessee from the ambit and scope of any bad debt or part thereof written off as irrecoverable in the accounts of the assessee . Thus the concept of making a provision for bad and doubtful debts will fall outside the scope of Section 36(1)(vii) simplicitor. The proviso as already noticed will have to be read with the provisions of Section 36(1)(viia) of the Act. Once the bad debt is actually written off as irrecoverable and the requirements of Section 36(2) satisfied then it will not be permissible to deny such deduction on the apprehension of double deduction under the provisions of Section 36(1)(viia) and proviso to Section 36(1)(vii). This does not appear to be the intention of the framers of law. The scheduled and non-scheduled commercial banks would continue to get the full benefit of write off of the irrecoverable debts under Section 36(1)(vii) in addition to the benefit of deduction of bad and doubtful debts under Section 36(1)(viia). Mere provision for bad and doubtful debts may not be allowable but in the case of a rural advance the same in terms of Section 36(1)(viia)(a) may be allowable without insisting on an actual write off. Substantial question of law framed in this case is answered in favour of the assessee

Summary

Issues:
Interpretation of provisions for bad and doubtful debts under Section 36(1)(viia) and Section 36(1)(vii) of the Income Tax Act.

Analysis:

1. Interpretation of Provisions: The main issue in this case revolves around the interpretation of provisions for bad and doubtful debts under Section 36(1)(viia) and Section 36(1)(vii) of the Income Tax Act. The Tribunal had disallowed the bad debt claim made by the assessee, which was challenged by the revenue in this appeal. The question was whether the appellate authorities were correct in holding that the disallowed bad debt claim was not justified. The judgment referred to a previous case involving a bank and highlighted that the legislative intent was to encourage rural advances and provisions for bad debts related to rural branches. The Apex Court emphasized that the deductions under Section 36(1)(vii) should not be negated by limitations of Section 36(1)(viia) to prevent double deduction.

2. Legislative Intent and Circulars: The judgment cited the legislative intent behind the provisions related to bad and doubtful debts, particularly focusing on encouraging rural business and providing greater deductions for banks dealing with rural advances. It emphasized that the deductions permissible under Section 36(1)(vii) should not be neutralized against other independent deductions provided under the Act. The Court highlighted that the language of Section 36(1)(vii) was unambiguous and applied to all banks, commercial or rural, scheduled or unscheduled. It clarified that the proviso to Section 36(1)(vii) did not control the application of the provision in absolute terms but only came into play when the case fell under Section 36(1)(viia).

3. Decision and Ruling: Based on the interpretation of the relevant provisions and the legislative intent, the Court ruled in favor of the assessee and against the revenue. The substantial question of law framed in the case was answered in favor of the assessee, leading to the dismissal of the appeal. The judgment concluded that the provisions of Section 36(1)(vii) should not be restricted by the provisions of Section 36(1)(viia) to prevent double deduction, especially concerning bad debts related to rural advances. The decision aligned with the objective of the law to provide deductions for bad debts without hindering the benefits available to banks dealing with rural branches.