2009 (12) TMI 394 - HC - Income Tax

Bad debt- Provision for bed and doubtful debt. No distinction between bad debt written off in respect of advances by rural branches and bed debts pertaining to advance by other branches. Held that- deduction for bad debt written off under clause (vii) allowable only on excess over provision created and allowed under clause (viia).

Issues Involved:
1. Applicability of the proviso to section 36(1)(vii) of the Income-tax Act, 1961, regarding the deduction of bad debts.
2. Interpretation of section 36(1)(viia) and its impact on bad debt deductions.
3. Relevance of pending Supreme Court cases to the High Court's decision-making process.

Comprehensive, Issue-wise Detailed Analysis:

1. Applicability of the Proviso to Section 36(1)(vii):
The primary issue is whether the respondents-banks are entitled to a deduction of bad debts written off, which is not in excess of the credit balance in the provision for bad and doubtful debts account made under clause (viia) of section 36(1) of the Income-tax Act, 1961. The controversy revolves around the application of the proviso to section 36(1)(vii) concerning the respondent-banks' claim for deduction of bad debts actually written off in the accounts.

The Department argued that the ceiling contained in the proviso to section 36(1)(vii) applies to the bad debts claimed by all banks to which clause (viia) applies. Conversely, the respondent-banks contended that the proviso applies only to bad debts pertaining to rural branches, allowing them to claim deductions for other bad debts even if not in excess of the provision created under clause (viia).

2. Interpretation of Section 36(1)(viia):
The court examined the relevant provisions before and after the amendments by the Finance Act, 1985, and the Income-tax (Amendment) Act, 1986. The amendments introduced a proviso to section 36(1)(vii) limiting the deduction of bad debts for banks to which clause (viia) applies, stating that the amount of deduction shall be limited to the amount by which such debt exceeds the credit balance in the provision for bad and doubtful debts account.

The Division Bench in South Indian Bank Ltd. v. CIT had previously interpreted that the proviso to section 36(1)(vii) applies only to bad debts written off in respect of advances made by rural branches. However, the Full Bench disagreed, stating that the proviso applies to all banks covered by clause (viia), regardless of whether the debts pertain to rural or other branches. The Full Bench clarified that the proviso refers to "the bank to which clause (viia) applies" and not to the specific debt in respect of which the provision is created.

3. Relevance of Pending Supreme Court Cases:
The senior counsel for the assessees argued that the hearing should be deferred until the Supreme Court decides the matter, citing precedents where the High Court kept matters pending due to related issues being under appeal in the Supreme Court. However, the court noted that numerous cases were listed for hearing, and the Division Bench had already doubted the correctness of the earlier decision, which was pending in the Supreme Court. The court decided to proceed with the hearing to avoid repetitive appeals, emphasizing that the Supreme Court's expectation to keep matters pending is to avoid unnecessary appeals, not to halt the High Court's decision-making process.

Conclusion:
The Full Bench concluded that the distinction drawn by the Division Bench in South Indian Bank Ltd.'s case between bad debts written off in respect of rural branches and other branches does not exist under the proviso to section 36(1)(vii). The court held that the said decision did not lay down the correct interpretation of the provisions of the Act. Consequently, the respondent-banks are entitled to claim deduction of bad debts written off only to the extent it exceeds the provision created and allowed as a deduction under clause (viia) of the Act.

The Full Bench allowed the appeals, setting aside the orders of the Tribunal and restoring the assessments confirmed in first appeals, thereby providing a conclusive interpretation of the relevant provisions.

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