Banking loss on fixed-deposit write-off allowed as business loss, while reserve entry failed deduction rules.
A reserve entry could not be treated as a provision for bad and doubtful debts, so deduction under section 36(1)(viia) was denied because the assessee had not created the requisite qualifying provision. By contrast, fixed deposits placed by a bank in the ordinary course of banking were treated as business assets, and the write-off of deposits with a co-operative bank after cancellation of its licence was regarded as a business loss. The claim was not sustainable under section 36(1)(vii), but relief was allowed to the extent the loss was actually incurred in the course of business.
Issues: (i) Whether the amount of Rs. 35,00,000 claimed as a "bad and doubtful reserve" was allowable as deduction under section 36(1)(viia) of the Income-tax Act, 1961 for the assessment year 2013-14; (ii) Whether the write-off of fixed deposits placed with Madhavpura Mercantile Co-operative Bank was allowable as a business loss for the assessment year 2014-15.
Issue (i): Whether the amount of Rs. 35,00,000 claimed as a "bad and doubtful reserve" was allowable as deduction under section 36(1)(viia) of the Income-tax Act, 1961 for the assessment year 2013-14.
Analysis: The claim was found to be a reserve entry and not a provision for bad and doubtful debts. A reserve is distinct from a provision, and deduction under section 36(1)(viia) is available only where a qualifying provision for bad and doubtful debts is made. The assessee had not created the requisite provision, and the amount could not be treated as deductible merely because it was routed through the computation of income.
Conclusion: The deduction was not allowable and the disallowance was upheld.
Issue (ii): Whether the write-off of fixed deposits placed with Madhavpura Mercantile Co-operative Bank was allowable as a business loss for the assessment year 2014-15.
Analysis: Deposits placed by a bank in the course of its banking activity were treated as part of its business operations and not as capital assets. The loss arising from the write-off of such deposits, after the borrowing bank's licence was cancelled and recovery became doubtful, was held to be a business loss incurred in the course of banking business. The absence of a debit to the profit and loss account was not conclusive, and the claim was not sustainable under section 36(1)(vii) but was allowable under section 37 to the extent of the business loss actually suffered.
Conclusion: The write-off was partly allowable as a business loss, and the addition was directed to be reduced accordingly.
Final Conclusion: The appeal succeeded only in part, with relief granted for the business-loss claim relating to the fixed-deposit write-off, while the claim for deduction of the reserve amount was rejected.
Ratio Decidendi: In banking business, deposits placed in the ordinary course of operations may constitute business assets, and a loss on their write-off can be allowable as business loss; however, a reserve cannot be equated with a provision for purposes of section 36(1)(viia).
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AI Drafter ✕
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