Bad debt provision deduction denied where only a provision was created; rectification upheld as issue was not debatable.

A provision for bad and doubtful debts created by an NBFC under RBI prudential norms is not deductible under section 36(1)(vii) because the retrospective Explanation inserted by the Finance Act, 2001 restricts the deduction to debts actually written off in the accounts and excludes mere provisions. RBI norms and section 45Q of the RBI Act do not override the Income-tax Act's statutory scheme. As the legal position was clear from the retrospective amendment, the disallowance was not a debatable issue and was capable of correction by rectification under section 154.

---

---

Issues: Whether a provision for bad and doubtful debts made by a non-banking financial company in accordance with RBI prudential norms is allowable as a deduction under section 36(1)(vii) of the Income-tax Act, 1961, and whether disallowance of such provision could be made by rectification under section 154.

Analysis: The Explanation inserted below section 36(1)(vii) by the Finance Act, 2001 with retrospective effect from 1-4-1989 clarifies that a bad debt written off does not include any provision for bad and doubtful debts. The provision is intended to permit deduction only where the debt is actually written off in the accounts, and not where a mere provision is created. RBI prudential norms and section 45Q of the Reserve Bank of India Act, 1934 do not override the statutory scheme of the Income-tax Act. Since the legal position was clear from the retrospective Explanation, the disallowance did not involve any debatable issue and could be corrected under section 154.

Conclusion: The provision for bad and doubtful debts was not allowable as a deduction, and the rectification under section 154 was upheld.

---