In a major relief to banks, the Supreme Court has held that they can claim deductions for entire bad debts written off in respect of both rural and urban advances. It reversed the judgment of the full bench of the Kerala High Court that held that banks can claim deduction of the bad and doubtful debts actually written off only to the extent it exceeds the credit balance created and allowed as deduction.
Catholic Syrian Bank and Dhanlaxmi Bank, in a batch of cases, had sought the apex court's intervention in deciding whether they are eligible for deduction of the bad debts actually written off only for non-rural branches in view of Section 36(1)(vii), which limits the deduction allowable under the proviso to the excess over credit balance made under Clause (viia) of Section 36(1) of the Income Tax Act 1961.
Directing that all the matters be remanded to the assessing officer for computation in accordance with law, Chief Justice SH Kapadia said that clear legislative intent of the relevant provisions and unambiguous language of the circulars with reference to the amendments to Section 36 of the Act demonstrate that the deduction on account of provisions for bad and doubtful debts under Section 36(1)(viia) is distinct and independent of the provisions of Section 36(1)(vii) relating to allowance of the bad debts.
Catholic Syrian Bank and Dhanlaxmi Bank, in a batch of cases, had sought the apex court's intervention in deciding whether they are eligible for deduction of the bad debts actually written off only for non-rural branches in view of Section 36(1)(vii), which limits the deduction allowable under the proviso to the excess over credit balance made under Clause (viia) of Section 36(1) of the Income Tax Act 1961.
Directing that all the matters be remanded to the assessing officer for computation in accordance with law, Chief Justice SH Kapadia said that clear legislative intent of the relevant provisions and unambiguous language of the circulars with reference to the amendments to Section 36 of the Act demonstrate that the deduction on account of provisions for bad and doubtful debts under Section 36(1)(viia) is distinct and independent of the provisions of Section 36(1)(vii) relating to allowance of the bad debts.
“The legislative intent was to encourage rural advances and the making of provisions for bad debts in relation to such rural branches. Another material aspect of the functioning of such banks is that their rural branches were practically treated as a distinct business, though, ultimately, these advances would form part of the books of accounts of the principal or head office branch... this court would be more inclined to give an interpretation to these provisions, which would serve the legislative object and intent, rather than to subvert the same,” it said.
The judgment said that proviso to Section 36(1)(vii) and Sections 36(1)(viia) and 36(2) (v) have to be read and construed together. “They form a complete scheme for deductions and prescribe the extent to which such deductions are available to a scheduled bank in relation to rural loans etc., whereas Section 36(1)(vii) deals with general deductions available to a bank and even non-banking businesses upon their showing that an account had become bad and written off as irrecoverable in the accounts of the assessee for the previous year, satisfying the requirements contemplated in that behalf under Section 36(2)," it added.
The banks had argued that the view taken by the full bench of the high court cannot be sustained as there are distinct and different items of account that are maintained by the bank in the normal course of its business and it is not permissible to interchange these items in accordance with the settled standards of accountancy or even in law.
The banks had argued that the view taken by the full bench of the high court cannot be sustained as there are distinct and different items of account that are maintained by the bank in the normal course of its business and it is not permissible to interchange these items in accordance with the settled standards of accountancy or even in law.
As such, the claim of doubtful and bad debts could not have been added back to taxable income as it was an additional liability of the bank being shown as an independent item, they added. The assessing officer in different cases had disallowed the banks' claim for deduction in respect of bad debts written off under the Act on the ground that the actual written-off debts were less than the provision for bad and doubtful debts.
Financial express, New Delhi, 23-02-2012
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