Bank provision for standard assets held allowable where made under RBI prudential norms and not treated as contingent expenditure.

A bank's provision for standard assets made in accordance with mandatory RBI prudential norms was treated as akin to provisioning for bad and doubtful debts, and therefore allowable in principle under the deduction scheme for banks. The Tribunal held that such a provision could not be disallowed merely because it was a prudential or notional entry, or characterised as capital or contingent expenditure. The disallowance was accordingly deleted in favour of the assessee, and the remaining ground was not pressed.

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Issues: Whether the disallowance of the provision created for standard assets was sustainable under the Income-tax Act.

Analysis: The provision was claimed by a co-operative bank carrying on banking business and was supported by Reserve Bank of India prudential norms. The Tribunal noted that the claim was akin to provision for bad and doubtful debts and was of the same nature as the deduction recognised under section 36(1)(viia). Following its own earlier decision in a similar matter, the Tribunal held that the provision for standard assets could not be treated as an inadmissible capital or contingent expenditure merely because it was a prudential, notional provisioning entry.

Conclusion: The disallowance was not justified and the Assessing Officer was directed to delete it, in favour of the assessee.

Final Conclusion: The appeal succeeded on the substantive issue relating to provision for standard assets, while the remaining ground was not pressed.

Ratio Decidendi: A provision made by a bank for standard assets in accordance with mandatory RBI prudential norms, when treated as part of provisioning for bad and doubtful debts, is allowable in principle under the deduction scheme applicable to banks and cannot be disallowed merely as a contingent or capital outlay.

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