2002 (8) TMI 266 - AT - Income Tax

Summary

Issues Involved:
1. Deduction of bad debts u/s 36(1)(vii) and its proviso.
2. Interpretation of clause (viia) of section 36(1) regarding rural and non-rural advances.
3. Application of the proviso to clause (vii) to rural and non-rural advances.

Summary:

1. Deduction of Bad Debts u/s 36(1)(vii) and its Proviso:
The assessee, a scheduled bank, claimed deductions for debts written off u/s 36(1)(vii). The Assessing Officer (AO) disallowed the claim, stating that the actual write-off was less than the provision made for bad and doubtful debts, thus invoking the proviso to section 36(1)(vii). The assessee contended that the proviso applies only to rural advances, not non-rural advances. The CIT(A) accepted the assessee's contention, allowing the claim for non-rural advances.

2. Interpretation of Clause (viia) of Section 36(1) Regarding Rural and Non-Rural Advances:
Clause (viia) was introduced to allow deductions for provisions made for bad and doubtful debts relating to rural advances. The Tribunal examined various Circulars (Circular No. 258, Circular No. 464, and Circular No. 421) which clarified that the intention behind clause (viia) was to promote rural banking by allowing deductions for provisions without actual write-offs. The Tribunal noted that the proviso to clause (vii) was introduced to prevent double deductions for the same rural advance.

3. Application of the Proviso to Clause (vii) to Rural and Non-Rural Advances:
The Tribunal held that the proviso to clause (vii) applies only to rural advances. The Revenue's contention that the proviso applies to all advances was rejected. The Tribunal emphasized that the proviso limits its application to banks to which clause (viia) applies, i.e., rural advances. The Tribunal concluded that the actual write-off of non-rural advances is not affected by the proviso to clause (vii).

Conclusion:
The Tribunal answered the referred question in the affirmative, holding that debts actually written off which do not arise out of rural advances are not affected by the proviso to clause (vii). The matter was remanded to the AO to examine the factual position and decide accordingly. The Tribunal's view aligned with the orders in the cases of Federal Bank Ltd. and Karur Vysya Bank Ltd., while rejecting the contrary view in the case of Dhanalakshmi Bank Ltd.