2012 (2) TMI 262 - SC - Income Tax

Bad debts versus Provisions for bad and doubtful debts - rural banking - Scope and ambit of the proviso to Section 36(1)(vii) - whether deduction of the bad and doubtful debts actually written off in view of Section 36(1)(vii) limits the deduction allowable under the proviso to the excess over the credit balance made under clause (viia) of Section 36(1) rural advances - Held that - U/s 36(1)(vii), the assessee would be entitled to general deduction upon an account having become bad debt and being written off as irrecoverable in the accounts of the assessee for the previous year, while the proviso will operate in cases under clause (viia) to limit deduction to the extent of difference between the debt or part thereof written off in the previous year and credit balance in the provision for bad and doubtful debts account made under clause (viia). The proviso to Section 36(1)(vii) will relate to cases covered under Section 36(1)(viia) and has to be read with Section 36(2)(v) of the Act. Thus, the proviso would not permit benefit of double deduction, operating with reference to rural loans. Therefore, we hold that provisions of Sections 36(1)(vii) and 36(1)(viia) are distinct and independent items of deduction and operate in their respective fields Decided in favor of assessee.

Summary

Issues Involved:
1. Deduction of bad debts under Section 36(1)(vii) and Section 36(1)(viia) of the Income Tax Act, 1961.
2. Interpretation of the proviso to Section 36(1)(vii) and its application.
3. Applicability of circulars issued by the Central Board of Direct Taxes (CBDT).
4. Double deduction concern under Sections 36(1)(vii) and 36(1)(viia).

Issue-wise Detailed Analysis:

1. Deduction of Bad Debts under Section 36(1)(vii) and Section 36(1)(viia):
The primary issue revolves around the assessee's claim for the deduction of bad debts written off under Section 36(1)(vii) of the Income Tax Act, 1961. The assessee, a scheduled bank, argued that the deduction allowable under Section 36(1)(vii) is independent of the deduction under Section 36(1)(viia). The assessing officer disallowed the claim, stating that the bad debts did not exceed the credit balance in the provision for bad and doubtful debts account under Section 36(1)(viia). The Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) initially ruled in favor of the assessee, but the Full Bench of the Kerala High Court later reversed these decisions.

2. Interpretation of the Proviso to Section 36(1)(vii):
The Full Bench of the Kerala High Court held that the proviso to Section 36(1)(vii) limits the deduction of bad debts to the amount by which such debts exceed the credit balance in the provision for bad and doubtful debts account under Section 36(1)(viia). The Supreme Court, however, emphasized that Sections 36(1)(vii) and 36(1)(viia) are distinct and independent provisions. The bad debts written off in debts other than those for which the provision is made under clause (viia) will be covered under the main part of Section 36(1)(vii), while the proviso will operate in cases under clause (viia) to limit the deduction.

3. Applicability of Circulars Issued by the CBDT:
Circulars issued by the CBDT, such as Circular No. 258 dated 14th June 1979 and Circular No. 421 dated 12th June 1985, clarified that the provisions of Section 36(1)(viia) are distinct and independent of Section 36(1)(vii). The Supreme Court upheld the validity and applicability of these circulars, stating that they aid in the uniform and proper administration of the provisions of the Act. The circulars indicated that the scheduled commercial banks would continue to get the benefit of the write-off of irrecoverable debts under Section 36(1)(vii) in addition to the benefit of deduction for the provision made for bad and doubtful debts under Section 36(1)(viia).

4. Double Deduction Concern:
The Supreme Court addressed the concern of double deduction raised by the Revenue. It was argued that allowing deductions under both Sections 36(1)(vii) and 36(1)(viia) would lead to double benefit. The Court clarified that the proviso to Section 36(1)(vii) was introduced to prevent double deduction specifically for rural advances covered under Section 36(1)(viia). The Court concluded that the proviso limits its application to bad debts arising out of rural advances and does not affect deductions for urban advances under Section 36(1)(vii).

Conclusion:
The Supreme Court held that the provisions of Sections 36(1)(vii) and 36(1)(viia) are distinct and independent items of deduction and operate in their respective fields. The bad debts written off in debts other than those for which the provision is made under clause (viia) will be covered under the main part of Section 36(1)(vii), while the proviso will operate in cases under clause (viia) to limit the deduction. Consequently, the appeals of the assessees were allowed, and the appeals preferred by the Revenue were dismissed. The matters were remanded to the assessing officer for computation in accordance with the law, in light of the law enunciated in this judgment.