RBI-compliant provisioning and commercial write-off principles govern deductions for doubtful debts, foreclosure charges, and hire-purchase income

Provision for doubtful debts and doubtful advances may be treated as a commercial write-off when debited to the profit and loss account, and RBI-compliant provisioning for non-performing assets can be deductible for an NBFC subject to verification. Foreclosure premium paid on premature repayment and refinancing was treated as revenue expenditure deductible in full in the year incurred because it was incurred to reduce future interest cost. A tax-driven change from sum-of-digits to capital recovery accounting for hire-purchase income was disallowed as not reflecting bona fide income recognition. The section 35D claim required verification of the statutory conditions and was left for amortised allowance where those conditions were met.

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Issues: (i) Whether provision for doubtful debts and doubtful advances could be allowed as a deduction when debited to profit and loss account and treated as a write-off in substance; (ii) whether foreclosure premium paid on premature repayment and refinancing of loans was allowable as revenue expenditure in the year of incurrence; (iii) whether the claim under section 35D required verification and allowance in the prescribed proportion; (iv) whether the change in method of accounting for hire-purchase income from sum-of-digits to capital recovery method was admissible for tax purposes; and (v) whether provision made for doubtful advances classified as non-performing assets under RBI guidelines was deductible.

Analysis: The deduction for doubtful debts was accepted on the footing that a provision created by debit to the profit and loss account and credit to a reserve/provision account can amount to a commercial write-off, and the commercial meaning of bad debt was preferred. The foreclosure premium was held to be wholly deductible because it represented a business expenditure incurred to secure lower future interest burden and was not treated as an item requiring spread-over merely because the benefit extended into later years. The section 35D claim was not finally rejected on merits; instead, the matter was remitted for the Assessing Officer to verify the foundational facts and grant amortised deduction where the statutory conditions were satisfied. The change in accounting method was disallowed because the switch was made only for tax computation and did not represent a bona fide change in the accounts reflecting the true income of the assessee. For RBI-directed provisioning on non-performing assets, the Tribunal treated the prudential norms as binding for NBFCs and held that provision made in accordance with those norms represented a legitimate deduction in computing taxable income, subject to item-wise verification by the Assessing Officer.

Conclusion: The claim for doubtful debts was allowed, the foreclosure premium was allowed in full, the accounting-method change was disallowed, the section 35D issue was sent back for verification and partial allowance, and the RBI-based provision for doubtful advances was allowed subject to verification.

Final Conclusion: The Tribunal granted substantial relief to the assessee by accepting the write-off theory for doubtful debts, permitting deduction of foreclosure charges, and recognising RBI-compliant provisioning for doubtful advances, while rejecting the tax-driven change in accounting method and remanding the section 35D claim for fresh examination.

Ratio Decidendi: For an NBFC, provision created in conformity with binding RBI prudential norms for non-performing and doubtful assets may be regarded as an allowable deduction in computing taxable income, while a change in accounting method adopted only for tax purposes and not reflecting the true income in the books is not acceptable.

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