2012 (11) TMI 505 - AT - Income Tax

Provision for bad and doubtful debts - disallowance - Held that - Allowance under Section 36(1)(viia) is not a standard allowance which is given but the allowance is subject to the actual provision made by the assessee, which in no case shall exceed 7.5% of the gross total income. Therefore, the argument of the assessee that whatever the provision it had actually made in its books, a provision of 7.5% of the gross total income had to be allowed, is not in accordance with law - against assessee. Provision for standard assets also has to be considered for applying the condition set out under Section 36(1)(viia) - Held that - Admittedly a provision on standard assets is not against any debts which had become doubtful. Standard assets are always considered recoverable, in the sense, bank has no doubt of recoverability. When the bank itself has treated such assets as good and recoverable, any provision made on such assets cannot be considered as a provision for bad and doubtful debts. The debt itself being good, a provision made on good debt cannot be considered as a provision for bad and doubtful debts. May be, the RBI has made a regulation for 10% provision for standard assets also a prudential norm but this can however be considered as a measure prescribed in abundant caution, to deal with a situation where banks are not to suffer shock of sudden delinquency that could happen in future. Nevertheless, possibility of happening of such a contingency cannot be a sufficient reason to consider a provision made on standard assets also as a provision for bad and doubtful debts. Therefore, claim of the assessee that provision for standard assets also has to be considered for applying the condition set out under Section 36(1)(viia) is not in accordance with law - against assessee. As here there was no enquiry made during the course of assessment proceedings. Therefore, the order which was silent on the claim made by the assessee, and allowing such claim, without any discussion, will definitely render it erroneous and prejudicial to the interests of Revenue as confirmed by CIT.

Summary

Issues Involved:
1. Interpretation of Section 36(1)(viia) of the Income-tax Act, 1961 regarding deduction for bad and doubtful debts.
2. Whether provision for standard assets can be considered as provision for bad and doubtful debts for the purpose of claiming deduction under Section 36(1)(viia).
3. Assessment of the correctness of the Assessing Officer's order under Section 263 of the Act.

Detailed Analysis:

1. Interpretation of Section 36(1)(viia):
The case involved a public sector bank appealing an order under Section 263 of the Income-tax Act, 1961, related to the deduction of bad and doubtful debts. The bank argued that the provision for bad and doubtful debts, along with provision for standard assets, should be considered for the deduction. However, the Commissioner of Income Tax (CIT) contended that only the actual provision for bad and doubtful debts should be considered for the deduction under Section 36(1)(viia). The CIT found the original assessment erroneous as it exceeded the actual provision made by the bank.

2. Provision for Standard Assets vs. Bad and Doubtful Debts:
The bank argued that the provision for standard assets should also be considered as a provision for bad and doubtful debts, citing RBI norms. However, the CIT disagreed, stating that standard assets are not doubtful debts and cannot be considered for the deduction under Section 36(1)(viia). The Tribunal concurred with the CIT, emphasizing that a provision on standard assets does not qualify as a provision for bad and doubtful debts. The Tribunal highlighted that the Assessing Officer had not properly evaluated the claim under Section 36(1)(viia), leading to an erroneous assessment prejudicial to revenue.

3. Assessment of the Assessing Officer's Order:
The Tribunal noted that the Assessing Officer's order lacked detailed consideration of the claim under Section 36(1)(viia) and did not assess whether the deduction was correctly calculated. The Tribunal emphasized that the lack of proper evaluation by the Assessing Officer rendered the order erroneous and prejudicial to revenue, in line with the decision in Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83. Consequently, the Tribunal dismissed the bank's appeal, upholding the CIT's decision under Section 263 of the Act.

In conclusion, the Tribunal upheld the CIT's decision, emphasizing the need for accurate interpretation of statutory provisions, proper assessment of deductions, and the importance of applying mind during assessments to avoid erroneous orders prejudicial to revenue.