By TIOL News Service

ERNAKULAM, SEPT 06, 2018: THE ISSUE BEFORE THE BENCH IS - Whether if the provision for bad debts is far more than the actual write-off, any further claim is warranted to be allowed u/s 36(1)(viia). NO IS THE ANSWER.

Facts of the case

The assessee-bank write off bad debts relating to rural branches amounting to around Rs.24.53 lakhs. However, during the assessment proceedings, the AO noticed that the assessee had made a provision with respect to rural advances which was evidenced from the books of accounts to the tune of around Rs.117 Cr. Therefore, the AO rejected the claim of the assessee for write off bad debts relating to rural branches. On appeal, the lower authorities upheld the decision of the AO.

The High Court held that,

++ section 36(1)(viia) provides for provision of bad and doubtful debts by a scheduled bank incorporated by or under the laws of India or a non-scheduled bank, to the extent of an amount not exceeding 5% of the total income and an amount not exceeding 10% of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner. The provision in the first limb of clause(viia) of Section 36(1) of the Act being an amount not exceeding 5% of the total income relates to the entire business of the bank, while the second limb is confined to the advances made by the rural branches of the bank. A harmonious construction would be that both these amounts can be claimed as provision for bad and doubtful debts;

++ under clause (vii) of Section 36(1) of the Act, the deduction permitted is of the actual write off of bad debts while clause (viia) of Section 36(1) deals with provision for bad and doubtful debts. Proviso to clause (vii) of Section 36(1) provides that when a provision has been made under clause (viia) of Section 36(1), the amount of deduction under clause (vii) of Section 36(1) shall be limited to the amount by which such claim exceeds the credit balance in the provision made for bad and doubtful debts. Hence, when the bank had made a provision under clause (viia) of Section 36(1) for bad and doubtful debts to the extent of 10% of the rural advances, a subsequent claim for actual write off of bad debts arising insofar as the rural branches are concerned can be allowed only to the extent it exceeds the provision;

++ it is clear that the bank had made a provision insofar as the rural advances which evidenced from the books af accounts itself was Rs.117,86,00,000/-. The claim for actual write off for the subject assessment year is Rs.24,53,000/-, which is far lesser than the provision. Hence, the proviso definitely becomes applicable and the claim has to be restricted only to such amounts exceeding the provision. In the present case since the provision exceeds the actual written off amounts, there could be no claim raised. Therefore, the First Appellate Authority and the Tribunal to have correctly disallowed the claim under clause (vii) of Section 36(1) for reason of the provision made under clause (viia) of Section 36(1), relating to the business of rural branches being in excess of the claim for actual write off made for the previous year to the assessment year.

(See 2018-TIOL-1842-HC-KERALA-IT)