2011 (12) TMI 797 - HC - Income Tax

Summary

The case before the Bombay High Court involved a dispute regarding the deduction of bad debts and provisions for bad and doubtful debts by a banking company incorporated in the USA for the assessment year 2000-2001. The core legal question raised was whether the Income Tax Appellate Tribunal was correct in allowing a deduction under Section 36(1)(viia) of the Income Tax Act in excess of 5% of the total income assessed.The assessee had written off bad debts amounting to Rs. 52.36 crores and made provisions for bad doubtful debts totaling Rs. 34,61,58,000. The dispute arose from the deduction claimed by the assessee under Section 36(1)(viia) at Rs. 26,01,36,049, which was worked out at 5% of the adjusted total income. The assessing officer made disallowances, leading to an increase in the total income and a subsequent adjustment in the deduction under Section 36(1)(viia).The Commissioner of Income Tax (A) upheld the assessing officer's decision regarding the treatment of bad debts but later modified the deduction under Section 36(1)(viia) after various disallowances were deleted. The assessing officer then recalculated the deduction, leading to a reduced amount under Section 36(1)(viia) than initially computed. The assessee contended that the balance amount should be allowed under Section 36(1)(vii) of the Act.The Court analyzed the relevant provisions of Section 36 of the Income Tax Act, particularly focusing on the limitations and conditions for deductions related to bad debts and provisions for bad and doubtful debts. The Court clarified that the deduction under Section 36(1)(vii) should be limited to the amount by which the bad debt exceeds the credit balance in the provision for bad and doubtful debts account.The Court determined that the opening credit balance in the provision for bad and doubtful debts account should be considered for calculating the allowable deduction under Section 36(1)(vii). It concluded that the Tribunal's decision to allow the excess amount under Section 36(1)(vii) after the deduction under Section 36(1)(viia) was maintained at 5% of the total income was correct.Ultimately, the Court dismissed the appeal filed by the Revenue, upholding the Tribunal's decision regarding the allocation of deductions between Section 36(1)(vii) and Section 36(1)(viia) for the banking company.