2016 (6) TMI 1443 - AT - Income Tax

Disallowance for provision of bad and doubtful debts on standard assets - CIT-A allowed deduction holding that the claim of the assessee fall into the main provisions of section 36(1)(viia) - as per DR CIT(A) has wrongly allowed relief to the assessee as the provisions for bad and doubtful debts was on standard assets and as per the proviso to section 36(1)(viia) only the provisions for bad and doubtful debts was allowable - AO was of the opinion that the provisions made by the assessee against standard assets was a contingent liability and which was not allowable as business expenditure - HELD THAT - Deduction u/s 36(1)(viia) of the Act is allowed in respect of provisions for bad and doubtful debts This section does not differentiate between provision on bad assets and provision on standard assets. This deduction exclusively allows deduction in respect of provision for bad and doubtful debts to the extent mentioned in the various clauses of sub-section(1) of section 36 of the Act. The deduction under section 36(1)(viia) of the Act is allowed only in respect of certain specific categories of assessee mentioned in the clause like banks financial institutions etc. who are in business of lending money. It is not allowed even to non-banking financial institutions since they are not included in this clause. As seen that though section 36(1)(vii) states that deduction for provision is allowable in respect of provision for bad and doubtful debts the computation of such deduction is made with reference to total income of the specified Banks based upon quantum of average advances. The deduction of the provisions is neither limited to the quantum of bad debts in the books nor is computed with reference to the quantum of standard assets. The deduction in this clause refers to allowable provisions of anticipated default on the loans and advances made in respect of total assets including standard assets and the claim of the assessee does not fall into the proviso to section 36(1)(viia) as the proviso deals with further deduction for provisions on bad and doubtful debts. The claim of the assessee is covered in the main provisions of section 36(1)(viia) of the Act. The learned CIT(A) has passed a very exhaustive and speaking order and we do not find any infirmity in the same - Decided against revenue.

Summary

Issues:
- Interpretation of provisions for bad and doubtful debts under section 36(1)(viia) of the Income Tax Act for Asst. Year: 2008-09.

Analysis:
1. Background: The appeal was filed by Revenue against the order of learned CIT(A) for Asst. Year: 2008-09 concerning the disallowed relief of Rs.36,75,000 for provision of bad and doubtful debts on standard assets.

2. Assessing Officer's Observation: The Assessing Officer disallowed the provision of Rs.36,75,000 made by the assessee against standard assets, stating it was a contingent liability and not allowable as business expenditure.

3. ITAT's Initial Decision: The ITAT set aside the issue to the Assessing Officer for readjudication, emphasizing the need for proper examination of the claim and compliance with natural justice principles.

4. Assessing Officer's Fresh Order: Following the ITAT's direction, the Assessing Officer again disallowed the provision of Rs.36,75,000, stating that the claim for deduction in respect of standard assets was misplaced.

5. CIT(A)'s Decision: The learned CIT(A) allowed relief to the assessee, leading to the Revenue's appeal before the ITAT.

6. Revenue's Argument: The Revenue contended that the relief granted by the CIT(A) was incorrect as the provisions for bad and doubtful debts were on standard assets, not falling within the relevant Asst. Years specified under the proviso to section 36(1)(viia).

7. Assessee's Argument: The assessee argued that their claim was covered by the main proviso of Section 36(1)(viia) and not the specific proviso mentioned by the Revenue.

8. ITAT's Analysis: The ITAT examined the provisions of section 36(1)(viia) and concluded that the deduction was allowed for provisions for bad and doubtful debts without differentiation between bad assets and standard assets. The deduction was specific to certain categories of assesses, such as banks, for anticipated default on loans and advances, not limited to bad debts in the books.

9. Conclusion: The ITAT dismissed the Revenue's appeal, upholding the CIT(A)'s decision to allow the relief to the assessee under the main provisions of section 36(1)(viia) for the provision of bad and doubtful debts, irrespective of whether they were on standard assets. The judgment was pronounced on 22nd June, 2016.