By TIOL News Service

CHENNAI, MAY 24, 2016: THE issue is - Whether the provisions for Non-Performing Assets can be equated with provision for bad and doubtful debts, for purpose of claiming deduction u/s 36(1)(viia)(b). NO is the answer.

Facts of the case:

The assessee, branch of M/s. Bank of Ceylon, Chennai with headquarters at Colombo, Sri Lanka is assessed in India as foreign company. The assessee has filed its return declaring income of Rs.8,04,90,211/-. The case of assessee was selected for scrutiny and statutory notices were served upon the assessee. The details filed by the assessee were examined and after considering the submissions of the assessee, the assessment was completed u/s 143(3) determining total income of the assessee at Rs. 8,48,20,940/- by making various additions. On appeal, the CIT(A) sustained the disallowance of deduction claimed u/s 36(1)(viia)(b) of Rs.42,36,327/- on account of provision made for NPAs.

After hearing the parties, the Tribunal had held:

++ the AO has observed that as per the section, the assessee company falls under the category (b), wherein, an amount not exceeding 5% of the total income is allowed as deduction for the provision made for bad and doubtful debts. In the instant case no such provision is made. The argument of the assessee is that the provisions has been made in compliance with the Reserve Bank of India's IRAC norms and in accordance with the Banking Regulations Act was not accepted by the AO as these provisions are applicable only for the companies incorporated in India and not to a foreign Banking company. It was further argued before the AO that the provision for Non performing assets is a generic expression for provision for bad and doubtful debts and that it is only the head under which it is classified. It is seen that the provision of the Act is very clear and there is no ambiguity regarding the same. Since the assessee company has not created any provision for bad and doubtful debts, the deduction claimed u/s 36(i)(viia)(b) was disallowed and added back to the total income of assessee. The AO took a stand that provisions for NPA can't be equated with provision for bad and doubtful debts and since the bad debt provisions were not made, assessee is not entitled for deduction. He is of the view that there exists a clear distinction between what is classified as NPA and Bad debt. While dismissing the appeal of assessee, the CIT(A) observed that NPA and bad debt are not equal in all respect. Non-Performing Assets (NPAs) for the banks: the loans and advances given to the customers form the biggest part of bank's income generating assets. The incomes on these loans are generated in the form of interest or discount. When the repayment of the interest or installments on these loans remain unpaid for a specified period, after they are due for payment, these loans or advances are classified as NPAs to distinguish these loans from the Standard Assets (Performing Assets). But, a bad debt on loan is termed as a bad debt, when the recovery of the loan becomes impossible. Thus it may possible that all the bad debts may be non-performing assets (NPAs), but all the NPAs are not necessarily the bad debts;

++ the CIT(A) also observed that The entire thrust of RBI Directions is on presentation of NPA provision in the balance sheet of Bank. Presentation/ disclosure is different from computation/taxability of the provision for Bank. The nature of expenditure under the IT Act cannot be conclusively determined by the manner in which accounts are presented in terms of Master Circular. Therefore, RBI Directions, though deviate from accounting practice as provided in the Companies Act, do not override the provisions of the IT Act. By analysing the issue in detail after verifying the particulars available on record, the CIT(A) has passed the well reasoned order. In view of the above, since the CIT(A) has rightly held that the provisions for Non-Performing Assets cannot be equated with provision for bad and doubtful debts and since such provisions was not made, the assessee is not entitled for deduction.

(See 2016-TIOL-822-ITAT-MAD)