High Court clarifies interpretation of Section 36(1)(viia) in Income Tax Act

The Karnataka High Court, in an appeal under Section 260-A of the Income Tax Act, 1961 for Assessment Year 2009-10, addressed the interpretation of Section 36(1)(viia). The Court held that the creation of a requisite reserve is necessary for claiming under Section 36(1)(viia) and restricted the deductible amount to the provision for bad and doubtful debts created in the relevant year. The Court also disallowed the deduction for the shortfall between the upper limit under Section 36(1)(viia) and the actual provision. The appeal was dismissed in favor of the revenue, as previous judgments had already addressed and ruled against the assessee on similar issues.

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Issues involved:
- Interpretation of Section 36(1)(viia) of the Income Tax Act, 1961
- Allowance of claim for provision for bad and doubtful debts
- Deduction of shortfall in upper limit allowable under Section 36(1)(viia)

Analysis:
The judgment by the Karnataka High Court, delivered by Hon'ble Mr. Justice Alok Aradhe and Hon'ble Mr. Justice H.T. Narendra Prasad, deals with an appeal under Section 260-A of the Income Tax Act, 1961 regarding the Assessment Year 2009-10. The substantial questions of law raised in the appeal revolve around the interpretation of Section 36(1)(viia) of the Act. The first question posed was whether the creation of a requisite reserve in the books of account is a condition precedent for the allowance of the claim under Section 36(1)(viia). The second question raised was related to the restriction of the amount deductible under Section 36(1)(viia) to the extent of the provision for bad and doubtful debts created in the relevant previous year. The third question, raised without prejudice, focused on whether the shortfall between the upper limit allowable under Section 36(1)(viia) and the actual provision created in the present year should be allowed as a deduction in the current year due to the provision created in the subsequent year that exceeded such shortfall.

During the proceedings, the counsel for the assessee acknowledged that the substantial questions of law framed in the appeal had already been answered against the assessee in previous judgments by the Court. Specifically referring to judgments dated 21.10.2014 and 24.01.2020 in other cases. Based on this submission and the reasons provided in the aforementioned judgments, the Court concluded that the substantial questions of law in the present appeal are answered against the assessee and in favor of the revenue. Consequently, the Court found no merit in the appeal and dismissed it accordingly.

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