TaxTMI 
TaxTMI 
2026 (8) TMI 540
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....2013-14, it filed its return of income electronically on 30.09.2013 declaring Nil income and claiming carry forward of loss of Rs. 19,55,44,786/-. The return was selected for scrutiny under CASS, initially to examine large interest expenditure relatable to exempt income u/s. 14A. After examination, the Assessing Officer ("AO") accepted the assessee's explanation and made no disallowance u/s. 14A. However, the assessment culminated in disputes on two issues: 1. Quantum of deduction allowable u/s. 36(1)(viia) of the Income-tax Act, 1961 ("the Act"); and 2. Non-allowance of brought forward losses of earlier assessment years on the ground that reassessment proceedings for those years were pending. During the assessment proceedings, the assessee originally claimed deduction of Rs. 21,03,27,765/- u/s. 36(1)(viia), computed at 7.5% of total income plus 10% of aggregate average rural advances, as per the statutory formula. The AO observed that the actual provision created in the books of account for bad and doubtful debts was only Rs. 3,19,12,660/-. Upon being confronted, the assessee furnished a revised computation of income restricting the deduction u/s. 36(1)(....
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....ental Representative ("DR") strongly supported the assessment order. It was submitted that making of a provision for bad and doubtful debts is a condition precedent for claiming deduction u/s. 36(1)(viia). Where the provision actually made is less than the statutory ceiling, the deduction cannot exceed the provision made. The learned DR relied heavily on the jurisdictional co-ordinate Bench decision in the assessee's own case for AYs 2009-10, 2010-11, 2012-13 and 2014-15 in ITA Nos. 2789 to 2793/Chny/2024 dated 21.03.2025, wherein it was categorically held that deduction u/s. 36(1)(viia) is restricted to the actual provision made in the books, subject to the ceiling prescribed under the Act. Reliance was also placed on binding High Court judgments, including CIT v. Syndicate Bank (Karnataka HC), CIT v. Vijaya Bank, and State Bank of Patiala v. CIT (P&H), all of which hold that the language of section 36(1)(viia) is clear and unambiguous and does not permit deduction in excess of the provision actually created. 6. We have carefully considered the rival submissions and perused the material on record. Deduction u/s. 36(1)(viia) The issue before us is no longer res integ....
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....ed u/s. 36(1)(viia) of the Act, (i.e. 7.5% of total income and 10% of aggregate of average rural advances of the bank). 6. Aggrieved by the orders of assessments for the assessment years 200910 to 2012-13 and 2014-15, (subsequent to the ITAT order) the assessee preferred appeals before First Appellate Authority. The CIT(A) confirmed the view taken by the AO. The CIT(A) distinguished case laws relied on by the assessee and held claim of deduction u/s. 36(1)(viia) of the Act, should be limited to actual provision created for bad and doubtful debts made in the books of account, subject to ceiling provided u/s. 36(1)(viia) of the Act. The CIT(A) in this context, relied on Mumbai Bench of the Tribunal order in the case of Yes Bank Vs. DCIT in ITA No.3501 & 3239/Mum/2018 (order dated 30.06.2023). The relevant finding of the CIT(A) reads as follows:- "Decision on Ground Nos.1, 2 and 3: These grounds are taken up together as they are related to each other. The reliance of the Appellant on Southern Technologies Vs JCIT 228 ITR 440 (Supreme Court) is misplaced. The issue in this case was whether the benefit of section 36(i)(viia) can be extended to NBFCs. The appel....
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...."So also, as stated above, Section 36(1) (viia) provides for a deduction not only in respect of written off bad debt but in case of banks it extends the allowance also to any Provision for bad and doubtful debts 'made' by banks which incentive is not given to NBFCs. Therefore the judgement unequivocally emphasizes that provision for bad and doubtful debts has to be "made" by banks. In the absence of any provision for bad and doubtful debt made there would be no allowance u/s. 36(1)(viia). Going by the appellant's logic even in cases where no provision is made by the banks for bad and doubtful debts allowance u/s. 36(i)(viia) will still be available. This is clearly not the case as pointed out above. The appellant has conveniently omitted this part of the judgement. The appellant vide submission dated 18/07/2024 relied on a decision of Hon'ble ITAT Bangalore in the case of Syndicate Bank Vs Deputy Commissioner of Income tax 78 ITD(BANG). However as quoted above the Hon'ble Punjab and Haryana High Court in the case of State Bank of Patiala vs CIT[2005] 272 ITR 54 has clearly held that "9. We are, therefore, satisfied that the Tr....
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.... why the deduction is disallowed to the assessee is that assessee does not have any rural branches, we find that deduction u/s. 36(1)(viia) of the act is not restricted to the banks only having the rural branches. This has been dealt with in 42 taxmann.com 303 as under :- "34. It can be seen from the history of Sec.36(1)(vita) of the Act that at stage-l the deduction was allowed in respect of any provision for bad and doubtful debts made by a scheduled bank in relation to the advances made by its rural branches. At this stage the PBDD had to be linked to the advances made by Bank's rural branches. At stage-ll of Sec. 36(1) (vita), the deduction while computing the taxable profits was allowed of an amount not exceeding ten per cent of the total income (computed before making any deduction under the proposed new provision) or two per cent of the aggregate average advances made by rural branches of such banks, whichever is higher. At this stage also the PBDD had to be created and debited to the profit and loss account but it was not required to be done in relation to advances made by Bank's rural branches and can be in relation to any debt. PBDD need not be in relatio....
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....counts is necessary. 37. Though under Stage-II and Stage-III of the provisions of Sec. 36(1)(viia) of the Act, PBDD has to be created by debiting the profit and loss account of the sum claimed as deduction, the condition that the provision should be in respect of rural advances is not necessary. At stage-II of the provisions of Sec.36(1)(viia) of the Act, this condition was done away with and it was only necessary to create PBDD in the books of accounts and debit to profit and loss account. The quantification of the maximum deduction permissible u/s. 36(1)(viia) of the Act had to be done. Firstly it has to be ascertained as to what is 10% of the aggregate average advances made by rural branches, if the Bank has rural branches, otherwise that part of the deduction u/s. 36(1)(viia) of the Act will not be available to the bank. The second part of the deduction u/s. 36(1)(viia) has to be ascertained viz., 7.5% seven and one-half per cent of the total income (computed before making any deduction under this clause and Chapter VI-A). The above are the permissible upper limits of deductions u/s. 36(1)(via) of the Act. The actual provision made in the books by the Assessee on accou....
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.... deduction based on the maximum amount prescribed u/s. 36(1)(viia) of the Act. The case laws relied on by the assessee has been distinguished by the CIT(A) in the impugned orders at page 39 to 44 and we approve the CIT(A) order in distinguishing the same. The Hon'ble Karnataka High Court in the case of CIT Vs Syndicate Bank reported in (2020) 422 ITR 460 (Kar) considered an identical issue and has categorically held that conditions precedent for claiming deduction u/s. 36(1)(viia) of the Act is that there should have been "provision" made and if the "provision" so made is excess of prescribed limit made u/s., then deduction will be allowed only to the extent of limit so prescribed. However, if the "provision" made is lower than the prescribed limit, then deduction can be only to the extent of "provision" made. It was further held by Hon'ble High Court that language employed in section 36(1)(viia) of the Act is very clear and unambiguous and there is no need to go into intention or object behind said section. It was concluded by the Hon'ble Court that in absence of any "provision" made, deduction u/s. 36(1)(viia) of the Act cannot be allowed. The relevant finding of the Hon'ble Karn....
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....the Act." 10. The aforesaid judgement of the Hon'ble Karnataka High Court refers to its earlier judgement in the case of CIT Vs. Vijaya Bank in ITA No.1066 of 2008 (judgement dated 21.10.2014), wherein it was held that when quantum of "provision" made for bad and doubtful debts is less than the limit prescribed under the said section, then deduction can be allowed only to the extent of "provision" so made and not to the extent of amount prescribed under the said section. The relevant finding of the Hon'ble Karnataka High Court in the case of Vijaya Bank cited supra reads as follows:- "10. Therefore, it is clear that to claim deduction u/s. 36(1)(viia), the condition precedent is a provision for bad and doubtful debts should have been made in the accounts of the assessee. The Section speaks about the maximum amount under which such a provision should be made. If a provision is made in excess of the limits prescribed under the section, the assessee would not be entitled to deduction of the excess amount. At the same time, when the section speaks about the deductions in respect of any provision for bad and doubtful debts made unless such a provision is made, the asse....
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....n the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause." 7. This also clearly shows that making of provision equal to the amount claimed as deduction in the account books is necessary for claiming deduction u/s. 36(1)(viia) of the Act. The Tribunal has distinguished various authorities relied upon by the assessee wherein deductions had been allowed under various provisions which also required creation of reserve after the assessee had created such reserve in the account books before the completion of the assessment. It has been correctly pointed out that in all those cases, reserves/provisions had been made in the books of account of the same assessment year and not of the subsequent assessment year. 8. In the present case, the assessee has not made any provision in the books of account for the assessment year under consideration, ie., 1985-86, by making supplementary entries and by revising its balance-sheet. The provision has....