Bank denied section 36(1)(viia) deduction for bad debts without proper provision in books of accounts

ITAT Hyderabad dismissed assessee bank's claim for deduction under section 36(1)(viia) as no provision for bad and doubtful debts was made in books of accounts, which is mandatory. However, additional ground regarding deduction under section 36(1)(vii) for bad debts actually written off was remanded to AO for fresh examination. Issue regarding profit on sale of investment was remanded to AO to decide on merits after allowing assessee opportunity to produce documentary evidence. Depreciation claim on investments treated as current assets was dismissed. Matter regarding classification of investments as stock-in-trade was remanded to AO for verification per CBDT circular 665 dated 03/10/1993.

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Issues Involved:
1. Disallowance of bad debts written off.
2. Addition of profit on sale of investment.
3. Disallowance of depreciation claimed on investment.

Detailed Analysis:

1. Disallowance of Bad Debts Written Off:
The first issue pertains to the disallowance of Rs. 173,15,46,253/- on account of debts written off by the assessee. The Assessing Officer (AO) disallowed the claim as the assessee did not create any provision under Section 36(1)(viia) in the books of accounts, which is a mandatory requirement for claiming such deductions. The AO's stance was supported by various judicial pronouncements and the fact that the assessee did not fulfill the conditions stipulated under Sections 36(1)(viia) and 36(2)(v).

The CIT(A) upheld the AO's decision, noting that the assessee did not offer the reimbursement received under the Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS) as income. The tribunal admitted an additional ground raised by the assessee, which argued for the applicability of Section 36(1)(vii) independently of Section 36(1)(viia). The tribunal remanded the matter back to the AO to examine if the assessee complied with all legal requirements for claiming the deduction under Section 36(1)(vii).

2. Addition of Profit on Sale of Investment:
The second issue involves the addition of Rs. 5,11,09,716/- towards profit on the sale of investment. The assessee claimed that this amount was wrongly credited to the profit and loss account and filed a revised computation of income to exclude it. However, the AO did not consider the revised computation, stating that there were no specific directions from the tribunal on this issue. The CIT(A) upheld the AO's decision, noting that the assessee failed to provide sufficient evidence to support the claim.

The tribunal observed that the revenue authorities did not allow the claim due to a lack of necessary evidence/documents. The tribunal remanded the issue back to the AO, directing the AO to decide the issue afresh on merits after affording the opportunity of hearing to the assessee.

3. Disallowance of Depreciation Claimed on Investment:
The third issue concerns the disallowance of Rs. 7,05,18,382/- claimed by the assessee as depreciation on investment. The AO disallowed the claim, stating that the investments were not categorized as per RBI guidelines and were treated as capital investments, not stock in trade. The CIT(A) upheld this decision, noting that the guidelines issued by RBI or NABARD cannot override income tax provisions.

The tribunal noted that the investments on which depreciation was claimed were treated as current assets by the assessee. Under the Income Tax Act, depreciation is allowed only on fixed assets, not on current assets. However, the tribunal remanded the matter back to the AO to verify whether the investments fall under stock in trade as per CBDT Circular No. 665 dated 03/10/1993. If found to be stock in trade, the AO was directed to value the same at the lower of cost or market rate.

Conclusion:
- The first issue regarding the disallowance of bad debts written off was remanded back to the AO for fresh examination.
- The second issue concerning the addition of profit on the sale of investment was also remanded back to the AO for fresh consideration.
- The third issue related to the disallowance of depreciation on investment was remanded back to the AO to verify if the investments are stock in trade and to value them accordingly.

Separate Judgments:
No separate judgments by different judges were delivered in this case.

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