Amendment to proviso to section 36(1)(vii) with retrospective effect - Review of cases of Public Financial Institutions, State Financial Corporation and State Industrial Investment Corporation where effect to this proviso has not been given. - Income Tax - 1975/1999

INSTRUCTION NO. 1975/1999 Dated: October 25, 1999 Subject:- Amendment to proviso to section 36(1)(vii) with retrospective effect - Review of cases of Public Financial Institutions, State Financial Corporation and State Industrial Investment Corporation where effect to this proviso has not been given -regarding. Under section 36(1)(vii) of the Income tax Act, 1961 (herein after called 'the Act'); any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year, is allowed as deduction. However, such deduction in certain cases is restricted to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful accounts made under clause (viia) of section 36(1) of the Act. 2. The clause (viia) of section 36(1) of the Act is applicable to a scheduled bank a non scheduled bank a public financial institution a state financial corporation or a state industrial investment corporation. The provision envisages that deduction in respect of any provision for bad and doubtful debt made is allowed as deduction upto 5% of total income in the case above mentioned categories and upto 10% of the aggregate average advanced in the case of rural branches of scheduled and non-scheduled bank (except those incorporated outside India). 3. The Finance Act, 1997 has amended the proviso to section 36(1)(vii) of the Act with retrospective effect from 1.4.92. The amended provisions have been made applicable to all the assessees mentioned in para (2) above in respect of whom clause (viia) of section 36(1) of the Act applies instead of only to a bank as it stood prior to amendment. 4. The proviso to section 36(1) (vii) of the Act, restricting amount of deduction under section 36(1)(vii) in respect of the excess of credit balance in the provision for bad and doubtful debt, is required to be applied in all such cases. However, it has come to the notice of the Board that in some cases of public financial institution, state financial corporation and state industrial investment corporation, state financial corporation and state industrial investment corporation, assessments were completed for assessment year 1992-93 and sunsequent years before amendment was made in the proviso to section 36(1)(vii) of the Act by the Finance Act, 1997 and the same require modification in view of the retrospective amendment of law. 5. Accordingly, it is advised that Chief Commissioners/Commissioners of Income tax may ensure that Assessing Officers review all such cases of public financial institutions, state financial corporations and state industrial investment corporations where amended provision of section 36(1)(vii) of the Act were not given effect to in assessment year 1992-93 and subsequent years and take remedial action as per law. 6. This may be brought to the knowledge of all officers of your region. F.No. 228/8/99/ITA.II (Kamlesh C. Varshney) Under Secretary to the Govt. of India