2013 (1) TMI 209 - HC - Income Tax

Method of operation of proviso to section 36(1)(vii) Bad debts written-off Provision for doubtful debts - Assessee is in banking business - Circular No.17/2008 dated 26-11-2008 - Assessee had claimed a deduction u/s 36(1)(vii) by way of bad debt - Simultaneously claimed deduction u/s 36(1)(vii)(a) for provision for bad and doubtful debts - The revenue s contention is that by virtue of such proviso, the claim of the assessee for deduction for debts written off, should be reduced by the closing balance of the assessee in his account for the provision of bad and doubtful debts. On the other hand, the assessee contends that such diminution should be limited to the opening balance of such account Whether for the purpose of section 36(1)(vii) only the closing credit balance in the provision account of the earlier years is to be considered, despite the provision of section 36(2)(v) Held that - As the statutory provision is silent on the precise method of working out the deduction. The issue has been made sufficiently clear by the CBDT Circular No.17/2008 dated 26-11-2008.(i) u/s 36(1)(vii), deduction on account of bad debts which are written off as irrecoverable in the accounts of the assessee is admissible. However, this should be allowed only if the assessee had debited the amount of such debs to the provision for bad and doubtful debt account u/s 36(1)(viia), as required by section 36(2)(v) - (ii). While considering the claim for bad debts u/s 36(1)(vii), the A.O. should allow only such amount of bad debts written off as exceeds the credit balance available in the provision for bad & doubtful debt account created u/s 36(1)(viia). The credit balance for this purpose will be the opening credit balance i.e., the balance brought forward as on 1st April of the relevant accounting year Therefore, bearing in mind the circular issued by CBDT dated 26-11-2008 appeal decides in favour of assessee

Summary

Issues Involved:
1. Interpretation of Section 36(1)(vii) and Section 36(1)(viia) of the Income Tax Act, 1961.
2. Application of the proviso to Section 36(1)(vii) regarding the deduction for bad debts.
3. Consideration of the credit balance in the provision for bad and doubtful debts account.

Detailed Analysis:

1. Interpretation of Section 36(1)(vii) and Section 36(1)(viia) of the Income Tax Act, 1961:
The primary issue revolves around the interpretation of Section 36(1)(vii) and Section 36(1)(viia) of the Income Tax Act, 1961. The assessee, a bank, claimed a deduction for bad debts written off under Section 36(1)(vii) amounting to Rs. 13,36,61,936/-. Additionally, the assessee claimed a deduction under Section 36(1)(viia) for a provision for bad and doubtful debts amounting to Rs. 1,36,09,550/-. The Assessing Officer (AO) questioned this claim and reduced the allowable deduction under Section 36(1)(vii) to Rs. 12 crores, considering the closing balance in the reserve account.

2. Application of the Proviso to Section 36(1)(vii):
The AO interpreted the proviso to Section 36(1)(vii) to mean that the deduction for bad debts should be reduced by the closing balance in the provision for bad and doubtful debts account. The Commissioner of Appeals partially agreed, stating that the deduction should be limited by the amount claimed and allowed under Section 36(1)(viia). The Tribunal, however, concluded that the deduction should be reduced by the opening balance in the provision for bad and doubtful debts account, not the closing balance. This interpretation was supported by the Tribunal's reliance on the decision of the Mumbai Bench in Oman International Bank SAOG v. Dy. CIT [2005] 92 ITD 76.

3. Consideration of the Credit Balance in the Provision for Bad and Doubtful Debts Account:
The Revenue's appeal contended that the Tribunal erred in its decision, arguing that the deduction for bad debts under Section 36(1)(vii) should be reduced by the closing balance in the provision for bad and doubtful debts account. The Revenue cited the Supreme Court's decision in Catholic Syrian Bank Ltd. v. CIT [2012] 343 ITR 270 to support its interpretation. The assessee, on the other hand, argued that the Tribunal's interpretation was correct and that the deduction should be reduced by the opening balance, as clarified by the CBDT Circular No. 17/2008 dated 26-11-2008.

Judgment:
The High Court dismissed the Revenue's appeals, upholding the Tribunal's decision. The Court noted that the statutory provisions were silent on whether the opening or closing balance should be considered for the deduction. However, the CBDT Circular No. 17/2008 clarified that the opening balance should be used. The Court emphasized that such circulars issued under Section 119(2) of the Act have the force of law and are binding on income-tax authorities, as they aid in the uniform and proper administration of the Act. The Court cited the Supreme Court's observations in UCO Bank v. CIT [1999] 237 ITR 889 and Catholic Syrian Bank Ltd. v. CIT [2012] 343 ITR 270 to support the binding nature of CBDT circulars.

In conclusion, the High Court ruled that the deduction for bad debts under Section 36(1)(vii) should be reduced by the opening balance in the provision for bad and doubtful debts account, as clarified by the CBDT Circular. The tax appeals were dismissed, affirming the Tribunal's judgment.