Provision for bad and doubtful debts is not deductible when the Income-tax Act expressly bars it, despite RBI provisioning norms.

A provision for irrecoverable advances made by an NBFC was not deductible as bad debt because the amount was only a provision in the profit and loss account, not an actual write-off of a debt as required under section 36(1)(vii). The retrospective Explanation to that provision expressly excludes provisions for bad and doubtful debts from deduction, and RBI prudential directions for NBFCs do not create an income-tax deduction where the Act denies it. The alternative claim for treatment as business loss also failed, since the statutory bar could not be bypassed by recharacterising the same provision.

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Issues: Whether the provision for irrecoverable advances made by the assessee-NBFC was allowable as a deduction under section 36(1)(vii) of the Income-tax Act, 1961, or alternatively as a business loss.

Analysis: The Explanation inserted to section 36(1)(vii) with retrospective effect expressly excludes any provision for bad and doubtful debts from the scope of deductible bad debts written off. The assessee had debited the amount as a provision in its profit and loss account and had not written off a debt in the manner required for deduction. The RBI directions under section 45JA of the Reserve Bank of India Act, 1934 required provisioning by NBFCs, but they did not confer any right to deduction for income-tax purposes, and section 45Q did not override the specific denial of deduction under the Income-tax Act. The alternative plea for allowance as business loss was also rejected because the statute specifically barred such deduction in the given context, and the cited authorities pre-dated the retrospective Explanation or dealt with materially different situations.

Conclusion: The provision was not allowable as a deduction under section 36(1)(vii) and could not be allowed as business loss.

Ratio Decidendi: Where a statutory Explanation expressly excludes provisions for bad and doubtful debts from deduction, a provision made to comply with regulatory prudential norms cannot be claimed as an income-tax deduction or recast as business loss to bypass that specific prohibition.

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