Facts of the Case

The assessee, Vijaya Bank, a banking company, claimed deduction in respect of bad debts written off and provisions for bad and doubtful debts in its return of income. The Assessing Officer disallowed the claim on the ground that the write-off did not satisfy statutory conditions and that the amounts were covered by existing provisions created under Section 36(1)(viia). The dispute arose regarding whether the assessee was entitled to deduction for bad debts written off independently of the provision account and whether the statutory requirements had been fulfilled.

Issues Involved

  1. Whether bad debts written off by the bank qualify for deduction under Section 36(1)(vii).
  2. Whether such deduction must be adjusted against the provision for bad and doubtful debts created under Section 36(1)(viia).
  3. Whether the conditions prescribed under Section 36(2) were satisfied.
  4. Whether provisions relating to rural advances apply to non-rural advances as well.

Petitioner’s Arguments (Assessee’s Contentions)

  • The assessee contended that the debts had been actually written off in its books and therefore deduction under Section 36(1)(vii) was allowable.
  • It was argued that Sections 36(1)(vii) and 36(1)(viia) operate independently and deduction for actual write-off cannot be denied merely because a provision exists.
  • The assessee submitted that the proviso restricting deduction applies only to the extent specified in law and primarily to rural advances.
  • Reliance was placed on judicial precedents recognizing that once the write-off is effected in accounts, the deduction must be granted.

Respondent’s Arguments (Department’s Contentions)

  • The Revenue contended that the bad debts claimed were already covered by the provision for bad and doubtful debts allowed under Section 36(1)(viia).
  • It was argued that allowing deduction under Section 36(1)(vii) without adjusting the provision would result in double deduction.
  • The Department maintained that statutory conditions under Section 36(2), including adjustment through the provision account, were not fulfilled.
  • It was further contended that provisions apply to all advances unless specifically excluded.

Court Order / Findings (ITAT Decision)

The Tribunal analyzed the interplay between Sections 36(1)(vii), 36(1)(viia), and 36(2). It observed that deduction for bad debts written off is allowable where the assessee demonstrates actual write-off in its books in accordance with statutory requirements.

The Tribunal further held that the restriction contained in the proviso to Section 36(1)(vii) is intended to prevent double deduction and applies to the extent of the credit balance available in the provision for bad and doubtful debts account. Judicial interpretation has clarified that provisions relating to rural advances cannot automatically be extended to non-rural advances without statutory basis.

Important Clarification

  • Deduction for bad debts requires actual write-off, not merely creation of a provision.
  • Sections 36(1)(vii) and 36(1)(viia) serve different purposes but must be read together to prevent double deduction.
  • For banks, provisions for rural advances have specific treatment under the Act.
  • Actual reduction of loans and advances in the balance sheet is a key indicator of valid write-off.

Link to download the order - https://itat.gov.in/public/files/upload/1610687142-127%20Vijaya%20Bank.pdf

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