2002 (11) TMI 53 - HC - Income Tax

Scheduled bank bad-debt write-offs vs provision deductions u/s36(1)(vii)/(viia): double-deduction barred; recomputation ordered.

The dominant issue was the scope of the proviso to s.36(1)(vii) of the Income-tax Act, 1961 for a scheduled bank claiming deduction of bad debts alongside ... Scope and ambit of the proviso to clause (vii) of sub-section (1) of section 36 - computation of the benefit - HELD THAT:- The intention of the Legislature in enacting the proviso to clause (vii) of section 36(1) and clause (v) to section 36(2) simultaneously is only to see that a double benefit in respect of the same bad debt is not being given to a scheduled bank. It is only for the said purpose, the proviso and clause (v) were introduced simultaneously by the Amendment Act, 1985, with effect from April 1, 1985. According to us, the scope of the proviso to clause (vii) of section 36(1) of the Act is only to deny the deduction to the extent of bad debt written off in the books with respect to which provision was made under clause (viia) of the Act. To make it clear, if the bad debt written off relates to debts other than for which the provision is made under clause (viia), such debts will fall squarely under the main part of clause (vii) which is entitled to deduction and in respect of that part of the debt with reference to which a provision is made under clause (viia), the proviso will operate to limit the deduction to the extent of the difference between that part of debt written off in the previous year and the credit balance in the provision for bad and doubtful debts account made under clause (viia). According to the Tribunal, the assessee-bank is entitled to the deduction under clause (vii) only of the difference between the provision made under clause (viia) and the bad debts written off in the accounts, without making any distinction in respect of debts relating to urban advances or rural advances. According to us, the Tribunal has not approached the issue in the proper perspective with reference to the provisions of sections 36(1)(vii), (viia) and 36(2)(v) of the Act. Now that we have explained the scope of the provisions of the proviso to clause (vii) of section 36(1) of the Act, we are of the view that the matter requires fresh consideration in the light of the said interpretation. Accordingly, we are of the view that the matter must go back to the Assessing Officer for consideration with reference to the interpretation placed by us in this judgment in the first instance. For the said limited purpose, we set aside the orders of the Tribunal and the first appellate authority on this point and direct the Assessing Officer to recompute the deduction available under clause (vii) of section 36(1) of the Act in the light of the interpretation placed by us on the proviso to the said clause under the section. These appeals are disposed of as above. Issues: Whether, for a scheduled bank, the proviso to clause (vii) of section 36(1) of the Income-tax Act, 1961 limits deduction only in respect of that part of the bad debt for which a provision has been made under clause (viia) and, consequently, whether the deduction under clause (vii) should be computed distinguishing between debts for which clause (viia) provisions were made and other debts.Analysis: A cumulative reading of section 36(1)(vii), section 36(1)(viia) and section 36(2)(v) shows the proviso and clause (v) were inserted to prevent a double benefit in respect of the same bad debt. Clause (v) of section 36(2) requires that the amount of debt or part thereof relating to advances covered by clause (viia) must be debited to the provision for bad and doubtful debts account before claiming deduction under clause (vii). The main part of clause (vii) permits deduction of bad debts subject to subsection (2). Where a bad debt written off comprises both rural-advances-related debt (for which clause (viia) provision is made) and other debts, the debiting obligation under clause (v) applies only to that part of the debt relating to advances for which a provision under clause (viia) has been made. The proviso therefore operates to limit the deduction only to the extent of the difference between that part of the debt written off (the part in respect of which clause (viia) provision exists) and the credit balance in the clause (viia) provision account; debts not covered by clause (viia) fall under the main part of clause (vii) and remain fully deductible subject to subsection (2).Conclusion: The proviso to clause (vii) of section 36(1) restricts deduction only in respect of that part of the bad debt for which a provision has been made under clause (viia); debts not for which provision under clause (viia) was made remain deductible under the main provision of clause (vii). This conclusion is in favour of the assessees (appellants).Final Conclusion: The appeals are disposed by setting aside the orders of the Tribunal and the first appellate authority on this point and directing the Assessing Officer to recompute the deduction under clause (vii) in accordance with the interpretation stated above and to consider facts afresh for recomputation.Ratio Decidendi: The proviso to section 36(1)(vii) and section 36(2)(v) together prevent double allowance only insofar as the part of a bad debt for which a clause (viia) provision has been made; deduction under clause (vii) for other debts remains available subject to subsection (2).