2016 (4) TMI 642 - AT - Income Tax

Tribunal upholds deduction restriction under section 36(1)(viia) but allows consideration of additional provisions.

The Tribunal upheld the restriction of the deduction under section 36(1)(viia) to the actual provision made during the year. However, it directed the ... Restriction of claim of deduction under section 36(1)(viia) - Held that:- From the bare perusal of the provisions, it is clear that the statute has provided that the provision for bad debt is required to be made by the scheduled Bank. Further, it is also provided in the section under consideration that the rate of 7.5% and 10% was dependent on the aggregate advances made. Thus the focal point of the section is made. The assessee is required to made the provision in the computation about the bad and doubtful debts, is dependent upon the aggregate average advances made in the relevant year. The language of the statute is clear and unambiguous and is not capable of any other interpretation. In view of the above, we are of the view that the provisions for bad and doubtful debt should be restricted to the amount of such provision which are actually created in the books of account in the relevant year. - Decided against assessee Entitlement to claim to Bad and Doubtful Debts - Held that:- The assessee is entitled to Bad and Doubtful Debts as claimed in the Balance Sheet for the relevant year. The AO is, therefore, directed to verify the Bad and Doubtful Debts claimed by the assessee in the revised computation of income. The assessee is also directed to produce all the documents to substantiate Bad and Doubtful Debts made by it either in the computation of total income or under Profit & Loss account. The AO shall decide the matter on merit without being influenced by the arithmetical calculation mentioned herein above. However, the AO shall be guided by the law stated herein above i.e. that the assessee is entitled to the benefit of Bad and Doubtful Debts made by it during the relevant year. Issues Involved:1. Restriction of claim of deduction under section 36(1)(viia) of the Income Tax Act.2. Allowance of deduction under section 36(1)(viia) for provisions made during the year.Issue 1: Restriction of Claim of Deduction Under Section 36(1)(viia)The assessee, a Co-operative Society Bank, claimed a deduction under section 36(1)(viia) of Rs. 72,71,317/- for provisions made for bad and doubtful debts. However, the Assessing Officer (AO) restricted the deduction to Rs. 11,17,000/-, which was the actual provision made in the balance sheet for the year. The AO emphasized that the deduction under section 36(1)(viia) is admissible only to the extent of the actual provisions made, as indicated by the wording of the statute.The Commissioner of Income Tax (Appeals) [CIT (A)] upheld the AO's decision, stating that the deduction must be based on the actual provision made during the year, which was Rs. 11,17,000/-. The CIT (A) rejected the assessee's argument that provisions made in earlier years should be considered for the deduction.The Tribunal agreed with the AO and CIT (A), highlighting that the statute's language is clear and unambiguous, requiring the provision for bad debts to be made in the relevant year. The Tribunal concluded that the deduction should be restricted to the actual provision created in the books of account for the relevant year, thereby deciding the issue against the assessee and in favor of the revenue.Issue 2: Allowance of Deduction for Provisions Made During the YearThe assessee contended that the actual provision for bad debts for the relevant year was Rs. 22,77,154/-, including Rs. 6,96,092/- for Special Bad Debts Reserve and Rs. 4,64,062/- for Bad and Doubtful Debt Reserves, apart from Rs. 11,17,000/- already allowed by the AO. The assessee argued that these additional provisions should also be considered for the deduction.The Tribunal directed the AO to verify the actual provisions made for bad and doubtful debts as claimed by the assessee in the revised computation of income. The AO was instructed to allow the deduction based on the verified amounts, ensuring the provisions were made during the relevant year. The Tribunal emphasized that the AO should decide the matter on merit, guided by the law that the assessee is entitled to the benefit of provisions made during the relevant year.Conclusion:The appeal was partly allowed, with the Tribunal confirming the restriction of the deduction to the actual provision made during the year but directing the AO to verify and allow additional provisions claimed by the assessee for the relevant year.