Bank's bad debt deduction under Section 36(1)(viia) limited to actual provision made in books, not claimed amount

ITAT Chennai reversed CIT(A)'s order allowing full deduction u/s. 36(1)(viia) for NPA provision. Assessee claimed higher amount in return than actual provision made. Following State Bank of Patiala precedent, ITAT held that deduction is limited to provision amount actually made in books for bad and doubtful debts. Revenue's appeal was allowed, restricting deduction to provision made rather than entire claimed amount.

---

---

Issues Involved:
1. Whether the deduction claimed under section 36(1)(viia) of the Income Tax Act, 1961 should be limited to the reserve created for Non-Performing Assets (NPA).
2. Whether the Reserve Bank of India (RBI) norms for creating reserves for NPAs are binding on the Income Tax Department.
3. Applicability of judicial precedents and CBDT instructions on the issue of deductions under section 36(1)(viia).

Issue-wise Detailed Analysis:

1. Limitation of Deduction under Section 36(1)(viia) to Reserve Created for NPA:
The primary issue in this case was whether the deduction claimed by the assessee under section 36(1)(viia) of the Income Tax Act, 1961 should be restricted to the reserve created for NPAs. The assessee, a cooperative bank, had created a reserve for NPA amounting to Rs. 17,52,92,029 but claimed a deduction of Rs. 20,73,99,433 in its return of income. The Assessing Officer (AO) disallowed the excess claim of Rs. 3,21,07,404, stating that the deduction should be limited to the reserve created.

On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted the disallowance, holding that the deduction under section 36(1)(viia) should not be restricted to the reserve created for NPA. The CIT(A) emphasized that the statutory requirement to create reserves under other laws should not affect the computation of deductions under the Income Tax Act, which has its own limitations.

2. Binding Nature of RBI Norms on Income Tax Department:
The Revenue argued that the CIT(A) failed to appreciate that RBI norms for creating reserves for NPAs are not binding on the Income Tax Department, as held by the Supreme Court in the case of Southern Technologies Ltd. The Revenue contended that the CIT(A) erred in holding that the deduction under section 36(1)(viia) need not be restricted to the reserves created, relying on the decision of the Punjab & Haryana High Court in the case of State Bank of Patiala, which held that the deduction cannot exceed the reserves created.

3. Judicial Precedents and CBDT Instructions:
The Tribunal considered various judicial precedents and CBDT instructions on the issue. The Revenue relied on the decision of the Punjab & Haryana High Court in the case of State Bank of Patiala, which held that making a provision for bad and doubtful debts equivalent to the amount claimed as a deduction in the account books is necessary for claiming deduction under section 36(1)(viia). The Tribunal also referred to the decisions of the Coordinate Benches in the cases of Nazareth Urban Co-Operative Bank Ltd. and The Salem Dt. Central Co-Op. Bank Ltd., which followed the Punjab & Haryana High Court's decision and held that the deduction should be limited to the provision made in the books of accounts.

The Tribunal noted that the CBDT Instruction No. 17/2008 clearly states that the deduction for provision for bad and doubtful debts should be restricted to the amount of such provision actually created in the books of the assessee in the relevant year or the amount calculated as per the provisions of section 36(1)(viia), whichever is less.

Conclusion:
The Tribunal held that the CIT(A) was not correct in allowing the entire amount claimed by the assessee without making a provision for NPA. It reversed the order of the CIT(A) and upheld the AO's decision to restrict the deduction to the reserve created for NPA. The Tribunal emphasized that making a provision for bad and doubtful debts equivalent to the amount claimed as a deduction in the account books is necessary for claiming deduction under section 36(1)(viia). Accordingly, the appeal filed by the Revenue was allowed.

---