My client is a State industrial investment corporation with a returned loss, and the Assessing Officer says the doubtful-and-loss-asset deduction under the proviso to s.36(1)(viia)(c) cannot be allowed because the five per cent limit in sub-clause (c) is computed on total income, which is nil. Is the proviso dependent on sub-clause (c) in that way?
No. The Madras High Court held that the proviso to sub-clause (c) of section 36(1)(viia) carves out an exception from the stipulation in sub-clause (c), because it uses the words "at its option" — words which would lose their significance if the proviso could not be read independently. The Revenue's contention that unless there is positive income the question of applying sub-clause (c) does not arise, and that the proviso cannot be read independently, was rejected, and the Revenue's appeal was dismissed with the substantial question of law answered in favour of the assessee. The Court added that the proper way to interpret the proviso is to give life to it and to the intention behind its insertion, which was to grant an incentive for the debt and capital market and the financial sector by providing a fiscal incentive for provisioning against bad and doubtful debts in banks and financial institutions.
Decided by the High Court (T.S. Sivagnanam J and N. Sathish Kumar J) on 2018-11-13, reported as Tax Case (Appeal) No. 272 of 2009 (High Court of Judicature at Madras), assessment year 2003-04; no law-report citation is printed on the document read. It bears on section 36(1)(viia), section 36(1)(viia)(c), section 260A of the Income Tax Act 1961, in Deductions & Disallowances, How Tax Law Is Read and Appeals matters.
The point is narrow but it recurs whenever an institution in sub-clause (c) — a public financial institution, a State financial corporation or a State industrial investment corporation — has a loss year and has made provision against assets the Reserve Bank of India classifies as doubtful or loss assets. The Revenue's argument treats the proviso as merely quantifying a deduction that the main sub-clause has already given, so that a nil total income means nil deduction; the Court's answer is that the option in the proviso is a separate route with its own base (a percentage of the doubtful and loss assets in the books on the last day of the previous year, not a percentage of total income), and that treating it as parasitic on the main sub-clause would empty the words "at its option". The limit on the decision is important and must be told to any client: the proviso to sub-clause (c) is confined by its own words to "any of the two consecutive assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005", and the corresponding proviso to sub-clause (a) to the "relevant assessment years", defined as the five consecutive assessment years commencing on or after 1 April 2000 and ending before 1 April 2005. Both are spent by their own terms. So the decision is of direct use only in an old appeal, and of indirect use as authority on how an "at its option" proviso in this clause is to be construed against the main provision.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee is a wholly owned Government of Tamil Nadu company. For assessment year 2003-04 it filed a return declaring a loss of Rs.27,52,31,850, subsequently revised to a net loss of Rs.54,68,55,640. In the course of assessment the Assessing Officer noticed a claim of Rs.28,39,31,639 under the proviso to section 36(1)(viia)(c). He held that the deduction was allowable only if the assessee had positive income before any deduction under the clause and under Chapter VI-A, and that as the assessee had returned a loss in both the original and the revised return the deduction was not allowable. The Commissioner of Income-tax (Appeals)-III accepted the assessee's case by order dated 2 February 2007. The Revenue appealed to the Tribunal, which concurred with the Commissioner and dismissed the appeal by order dated 12 September 2008. The Revenue appealed to the High Court under section 260A, and the appeal was admitted on 27 April 2009 on the substantial question of law "Whether on the facts and circumstances of the case, the Tribunal was right in holding that the assessee is entitled to deduction of provision made in respect of doubtful and loss assets under Section 36(1)(viia)(c) in terms of the proviso to that section, even though the assessee did not have any positive profits to set it off from?". Senior Standing Counsel for the Revenue submitted that the proviso, inserted by the Finance Act 2002 with effect from 1 April 2003, is dependent upon sub-clause (c), which allows a provision not exceeding five per cent of total income computed before any deduction under the clause or under Chapter VI-A, and that unless there is positive income the question of applying sub-clause (c) does not arise and the proviso cannot be read independently.
The Revenue's appeal was dismissed and the substantial question of law was answered in favour of the assessee, with no costs (paragraph 12). The proviso to sub-clause (c) of section 36(1)(viia) carves out an exception from the stipulation in sub-clause (c), and the interpretation given by the Commissioner (Appeals) and the Tribunal is valid (paragraphs 8 and 12).
The Court declined to accept the Revenue's stand because the proviso uses the words "at its option": it allows a public financial institution, a State financial corporation or a State industrial investment corporation referred to in sub-clause (c), at its option, a deduction in any of the two consecutive assessment years commencing on or after 1 April 2003 and ending before 1 April 2005 in respect of a provision made for assets classified as doubtful or loss assets in accordance with the guidelines, computed by reference to the amount of such assets shown in the books on the last day of the previous year. If the proviso were parasitic on the main sub-clause the words "at its option" would lose their significance (paragraph 8). The amendment inserting the proviso with effect from 1 April 2003 had the object of granting an incentive for the debt and capital market and the financial sector, the Central Government having directed a fiscal incentive for provisioning in respect of bad and doubtful debts in banks and financial institutions; the proper method of interpreting the proviso is therefore to give life to it and to the intention behind its insertion (paragraph 9). A similar proviso, applying to scheduled and non-scheduled banks, is contained under sub-clause (a) and was inserted with effect from 1 April 2000, the Central Government thereby proposing to give a relief to State industrial corporations, public financial institutions and State financial corporations by giving them an option to claim a deduction in respect of a provision made for assets classified by the Reserve Bank of India as doubtful or loss assets (paragraph 10). The proviso also places a further condition, that the assets be so classified by the Reserve Bank of India in accordance with its guidelines (paragraph 11).
Thus, in our view, the proviso carves out an exception from the stipulation in sub-Clause (c) otherwise, the use of the expression "at its option" would loose its significance.
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Handle my notice → Ask a CA on WhatsAppNo. The Madras High Court held that the proviso to sub-clause (c) of section 36(1)(viia) carves out an exception from the stipulation in sub-clause (c), because it uses the words "at its option" — words which would lose their significance if the proviso could not be read independently. The Revenue's contention that unless there is positive income the question of applying sub-clause (c) does not arise, and that the proviso cannot be read independently, was rejected, and the Revenue's appeal was dismissed with the substantial question of law answered in favour of the assessee. The Court added that the proper way to interpret the proviso is to give life to it and to the intention behind its insertion, which was to grant an incentive for the debt and capital market and the financial sector by providing a fiscal incentive for provisioning against bad and doubtful debts in banks and financial institutions. This was decided by the High Court (T.S. Sivagnanam J and N. Sathish Kumar J) and bears on section 36(1)(viia), section 36(1)(viia)(c), section 260A of the Income Tax Act 1961. It is reported as Tax Case (Appeal) No. 272 of 2009 (High Court of Judicature at Madras), assessment year 2003-04; no law-report citation is printed on the document read. The point is narrow but it recurs whenever an institution in sub-clause (c) — a public financial institution, a State financial corporation or a State industrial investment corporation — has a loss year and has made provision against assets the Reserve Bank of India classifies as doubtful or loss assets. The Revenue's argument treats the proviso as merely quantifying a deduction that the main sub-clause has already given, so that a nil total income means nil deduction; the Court's answer is that the option in the proviso is a separate route with its own base (a percentage of the doubtful and loss assets in the books on the last day of the previous year, not a percentage of total income), and that treating it as parasitic on the main sub-clause would empty the words "at its option". The limit on the decision is important and must be told to any client: the proviso to sub-clause (c) is confined by its own words to "any of the two consecutive assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005", and the corresponding proviso to sub-clause (a) to the "relevant assessment years", defined as the five consecutive assessment years commencing on or after 1 April 2000 and ending before 1 April 2005. Both are spent by their own terms. So the decision is of direct use only in an old appeal, and of indirect use as authority on how an "at its option" proviso in this clause is to be construed against the main provision. If it applies to you, the first step is this: Check the assessment year against the proviso's own window before relying on this at all: sub-clause (c)'s proviso covers only two consecutive assessment years commencing on or after 1 April 2003 and ending before 1 April 2005.
The assessee is a wholly owned Government of Tamil Nadu company. For assessment year 2003-04 it filed a return declaring a loss of Rs.27,52,31,850, subsequently revised to a net loss of Rs.54,68,55,640. In the course of assessment the Assessing Officer noticed a claim of Rs.28,39,31,639 under the proviso to section 36(1)(viia)(c). He held that the deduction was allowable only if the assessee had positive income before any deduction under the clause and under Chapter VI-A, and that as the assessee had returned a loss in both the original and the revised return the deduction was not allowable. The Commissioner of Income-tax (Appeals)-III accepted the assessee's case by order dated 2 February 2007. The Revenue appealed to the Tribunal, which concurred with the Commissioner and dismissed the appeal by order dated 12 September 2008. The Revenue appealed to the High Court under section 260A, and the appeal was admitted on 27 April 2009 on the substantial question of law "Whether on the facts and circumstances of the case, the Tribunal was right in holding that the assessee is entitled to deduction of provision made in respect of doubtful and loss assets under Section 36(1)(viia)(c) in terms of the proviso to that section, even though the assessee did not have any positive profits to set it off from?". Senior Standing Counsel for the Revenue submitted that the proviso, inserted by the Finance Act 2002 with effect from 1 April 2003, is dependent upon sub-clause (c), which allows a provision not exceeding five per cent of total income computed before any deduction under the clause or under Chapter VI-A, and that unless there is positive income the question of applying sub-clause (c) does not arise and the proviso cannot be read independently. The matter was decided on 2018-11-13 by the High Court (T.S. Sivagnanam J and N. Sathish Kumar J). On those facts the High Court held as follows. The Revenue's appeal was dismissed and the substantial question of law was answered in favour of the assessee, with no costs (paragraph 12). The proviso to sub-clause (c) of section 36(1)(viia) carves out an exception from the stipulation in sub-clause (c), and the interpretation given by the Commissioner (Appeals) and the Tribunal is valid (paragraphs 8 and 12).
The Court declined to accept the Revenue's stand because the proviso uses the words "at its option": it allows a public financial institution, a State financial corporation or a State industrial investment corporation referred to in sub-clause (c), at its option, a deduction in any of the two consecutive assessment years commencing on or after 1 April 2003 and ending before 1 April 2005 in respect of a provision made for assets classified as doubtful or loss assets in accordance with the guidelines, computed by reference to the amount of such assets shown in the books on the last day of the previous year. If the proviso were parasitic on the main sub-clause the words "at its option" would lose their significance (paragraph 8). The amendment inserting the proviso with effect from 1 April 2003 had the object of granting an incentive for the debt and capital market and the financial sector, the Central Government having directed a fiscal incentive for provisioning in respect of bad and doubtful debts in banks and financial institutions; the proper method of interpreting the proviso is therefore to give life to it and to the intention behind its insertion (paragraph 9). A similar proviso, applying to scheduled and non-scheduled banks, is contained under sub-clause (a) and was inserted with effect from 1 April 2000, the Central Government thereby proposing to give a relief to State industrial corporations, public financial institutions and State financial corporations by giving them an option to claim a deduction in respect of a provision made for assets classified by the Reserve Bank of India as doubtful or loss assets (paragraph 10). The proviso also places a further condition, that the assets be so classified by the Reserve Bank of India in accordance with its guidelines (paragraph 11). In the words reproduced by the source cited on this page: "Thus, in our view, the proviso carves out an exception from the stipulation in sub-Clause (c) otherwise, the use of the expression "at its option" would loose its significance."
It was decided by the High Court on 2018-11-13 and is reported as Tax Case (Appeal) No. 272 of 2009 (High Court of Judicature at Madras), assessment year 2003-04; no law-report citation is printed on the document read. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 36(1)(viia), section 36(1)(viia)(c), section 260A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Revenue's appeal was dismissed and the substantial question of law was answered in favour of the assessee, with no costs (paragraph 12). The proviso to sub-clause (c) of section 36(1)(viia) carves out an exception from the stipulation in sub-clause (c), and the interpretation given by the Commissioner (Appeals) and the Tribunal is valid (paragraphs 8 and 12). It arises in Deductions & Disallowances, How Tax Law Is Read and Appeals matters, on section 36(1)(viia), section 36(1)(viia)(c), section 260A of the Income Tax Act 1961, and was decided by T.S. Sivagnanam J and N. Sathish Kumar J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If the year is inside the window, exercise and evidence the option — the proviso operates "at its option", so the claim must be made, and the working must be on the amount of the RBI-classified doubtful or loss assets shown in the books on the last day of the previous year, not on total income. Produce the RBI classification. The Court noted expressly that the proviso places a further condition that the assets be classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with its guidelines. Meet the Revenue's "no positive income" objection with paragraph 8: the words "at its option" carve the proviso out of the stipulation in sub-clause (c). For a current year, do not argue this; the sub-clause (c) deduction is five per cent of total income computed before any deduction under the clause and under Chapter VI-A, and there is no live doubtful-asset option.
Searched for later treatment; none was found. That is not the same as a source affirming it. No later decision citing this judgment has been found. Decisions on the same provision that do not refer to it exist - Indian Bank v CIT-II (Calcutta High Court, 20 March 2023), Karur Vysya Bank v DCIT (ITAT Chennai, 9 April 2024) and Indian Bank v ACIT (Madras High Court, 28 April 2026) - but none takes up the point decided here. So the construction of the 'at its option' proviso to section 36(1)(viia)(c) - that it carves out an exception and does not depend on the corporation having positive income - stands untested. It has not been doubted, but nor has it been applied, and a practitioner outside Tamil Nadu should expect to argue it from first principles. The more important qualification is that the proviso is spent. By its own words the option under the proviso to sub-clause (c) is available only in one of the two consecutive assessment years commencing on or after 1 April 2003 and ending before 1 April 2005, and the corresponding proviso to sub-clause (a) is confined to the five consecutive assessment years commencing on or after 1 April 2000 and ending before 1 April 2005. Both windows closed long ago. The decision is therefore of direct use only in an old appeal still alive on this point. What survives for present purposes is the method. The Court's reasoning - that a proviso opening with the words 'at its option' cannot be parasitic on the main sub-clause, because the words would otherwise lose their significance, and that a proviso should be interpreted so as to give life to it and to the intention behind its insertion - is general, and it is available wherever the Department argues that an optional proviso merely quantifies a deduction the main provision has already given. For a current year there is no live doubtful-asset option: the sub-clause (c) deduction is five per cent of total income computed before any deduction under the clause and under Chapter VI-A. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
A MISPRINT IN THE JUDGMENT, and it matters because it inverts the sense. At paragraph 8 the Court, setting out the proviso, writes "of an amount exceeding ten per cent of the amount of such assets" where the statute reads "not exceeding ten per cent". That is how the judgment is printed - the words are the same wherever the paragraph is read, so the slip is the judgment's own and not a reproduction artefact. The statutory text of section 36 reads "of an amount not exceeding ten per cent". Quote the statute for the ceiling and the judgment for the construction, and do not quote paragraph 8 for both. TWO DATES TAKEN FROM THE COURT AND NOT INDEPENDENTLY CHECKED. At paragraph 6 the Court states that the proviso to sub-clause (c) was inserted by the Finance Act 2002 with effect from 1 April 2003, and at paragraph 10 that the similar proviso under sub-clause (a) was inserted with effect from 1 April 2000. Both are the Court's own statements of legislative history and neither has been verified here. The second is at least consistent with the statutory Explanation, which defines "relevant assessment years" for sub-clause (a) as the five consecutive assessment years commencing on or after 1 April 2000 and ending before 1 April 2005. WHAT THE DECISION ACTUALLY TURNS ON. Two words. The proviso allows a public financial institution, a State financial corporation or a State industrial investment corporation referred to in sub-clause (c), "at its option", a deduction in respect of a provision made for assets classified by the Reserve Bank of India as doubtful or loss assets in accordance with its guidelines, computed by reference to the amount of such assets shown in the books on the last day of the previous year. The base is the assets, not total income. If the proviso could not be read independently of sub-clause (c), the words "at its option" would have nothing to do. THE PROCEDURAL HISTORY, WHICH IS UNUSUALLY CLEAN. The Commissioner (Appeals)-III accepted the assessee's case on 2 February 2007; the Tribunal concurred and dismissed the Revenue's appeal on 12 September 2008; the appeal under section 260A was admitted on 27 April 2009 and dismissed on 13 November 2018, with the substantial question answered for the assessee and no order as to costs. Three authorities concurred, which is worth saying when the decision is met with the argument that it stands alone. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Revenue's appeal was dismissed and the substantial question of law was answered in favour of the assessee, with no costs (paragraph 12). The proviso to sub-clause (c) of section 36(1)(viia) carves out an exception from the stipulation in sub-clause (c), and the interpretation given by the Commissioner (Appeals) and the Tribunal is valid (paragraphs 8 and 12).
TaxSphere, “CIT v Tamilnadu Industrial Investment Corporation Ltd (Madras High Court) — the "at its option" proviso to s.36(1)(viia)(c) carves out an exception and does not depend on the corporation having positive income”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-tamilnadu-industrial-investment-corporation-the-viia-c-option-proviso-does-not-require-positive-income/ (validity last checked 2026-09-09)
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