2012 (8) TMI 699 - AT - Income Tax

Disallowance of provision for bad and doubtful debts Held that - Deduction for bad debt(s) can be allowed only if the debt is written off in the books as bad debt - But in the case of rural advances, a deduction would be allowed even in respect of a mere provision without insisting on an actual write off - proviso indicates that it is limited in its application to bad debt(s) arising out of rural advances of a bank. It follows that if the amount of bad debt(s) actually written off in the accounts of the bank represents only debt(s) arising out of urban advances, the allowance thereof in the assessment is not affected, controlled or limited in any way by the proviso to clause (vii) - in favour of the assessee Decision in the case of Catholic Syrian Bank Ltd. vs CIT (2012 (2) TMI 262 - SUPREME COURT OF INDIA) followed.

Issues Involved:
1. Disallowance of provision for bad and doubtful debts.
2. Deduction for provision for doubtful debts as optional or additional.
3. Disallowance of bad debt written off for non-rural branches.
4. Applicability of the proviso to Section 36(1)(vii) to both rural and non-rural branches.

Detailed Analysis:

1. Disallowance of Provision for Bad and Doubtful Debts:
The assessee challenged the CIT(A)'s confirmation of disallowance of provision for bad and doubtful debts amounting to Rs. 63,45,02,440 under Section 36(1)(viia). The Tribunal noted that this issue was already decided against the assessee in a previous case (A.Y. 2003-04, ITA No. 2486/Kol/2007). The Tribunal upheld the CIT(A)'s decision, dismissing the ground by referencing the prior ruling, which stated that the additional deduction could not be allowed if the claim under Section 36(1)(viia)(a) was already granted.

2. Deduction for Provision for Doubtful Debts as Optional or Additional:
The assessee argued that the deduction for provision for doubtful debts should be considered an additional deduction and not optional. The Tribunal reiterated its previous decision, confirming that the deduction under the first proviso to Section 36(1)(viia)(a) is not an additional deduction if the main deduction has been allowed. This ground was also dismissed.

3. Disallowance of Bad Debt Written Off for Non-Rural Branches:
The assessee contested the disallowance of Rs. 44,10,54,680 for bad debts written off for non-rural branches under Section 36(1)(vii). The Tribunal referred to its earlier decision and the Supreme Court's ruling in Catholic Syrian Bank Ltd. vs CIT, which clarified that bad debts written off for non-rural branches are not affected by the proviso to Section 36(1)(vii). The Tribunal noted that the proviso is meant to prevent double deductions for rural advances and does not apply to non-rural advances. Consequently, the Tribunal directed the AO to allow the deduction for the bad debts written off for non-rural branches.

4. Applicability of the Proviso to Section 36(1)(vii) to Both Rural and Non-Rural Branches:
The Tribunal addressed whether the proviso to Section 36(1)(vii) applies to both rural and non-rural branches. It cited the Supreme Court's decision, which held that the proviso to Section 36(1)(vii) and Section 36(1)(viia) are distinct and operate independently. The Supreme Court emphasized that the proviso is intended to prevent double deductions for rural advances and does not limit the deduction for bad debts written off for non-rural advances. The Tribunal thus concluded that the proviso does not apply to non-rural branches and allowed the assessee's claim.

Conclusion:
The Tribunal dismissed the grounds related to the disallowance of provision for bad and doubtful debts and the classification of the deduction as optional or additional. However, it allowed the assessee's claim for the deduction of bad debts written off for non-rural branches, directing the AO to provide relief. The appeal was partly allowed, with the Tribunal's decision aligning with the Supreme Court's interpretation of the relevant provisions.

← Previous Next →