Deductibility of Provisions: bank provisioning for standard assets and bad debt reserve treated as allowable tax deduction.

Issue concerns whether a cooperative bank's provisioning for standard assets and a bad and doubtful debts reserve qualify as deductible under section 36(1)(viia) and computed under Rule 6ABA. The analysis applies the statutory eligibility criteria to provisioning mandated by RBI prudential norms, examines substance over label (provision for NPA versus bad and doubtful debts), and notes conformity with audited financials, tax audit reports and CBDT circulars explaining legislative intent. Conclusion: such provisioning, when computed as prescribed and reflecting prudential norms, is allowable as a deduction; outcome recorded in favour of the assessee.

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Issues: Whether the provision for standard assets and the bad and doubtful debts reserve created by a cooperative bank are allowable as deduction under section 36(1)(viia) of the Income-tax Act, 1961.

Analysis: The issue concerns a cooperative bank regulated under the Banking Regulation Act, 1949 which made provisioning for standard assets and created a bad and doubtful debts reserve, claimed as deduction under section 36(1)(viia) of the Income-tax Act, 1961 and computed as per Rule 6ABA of the Income Tax Rules, 1962. The provisioning is made in conformity with prudential norms and RBI guidelines including the Reserve Bank of India Master Circular dated 01.07.2015 and is reflected in the audited financials and tax audit report; CBDT Circular Nos. 258 (14.06.1979) and 421 (12.06.1985) explain the legislative intent behind section 36(1)(viia). Relevant precedents of coordinate benches and higher courts dealing with similar banking provisioning and standard asset provisions were considered. The analysis applies the statutory eligibility criteria for deduction under section 36(1)(viia) to the facts, examines the substance of the provisioning vis-a -vis its label (provision for NPA or provision for bad and doubtful debts), and evaluates whether provisioning mandated by RBI prudential norms amounts to provisions for bad and doubtful debts within the scope of the section.

Conclusion: The provision for standard assets and the bad and doubtful debts reserve are allowable as deduction under section 36(1)(viia) of the Income-tax Act, 1961; outcome in favour of the assessee.

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