My client bank has claimed under s.36(1)(viia) and has also written off bad debts. The Assessing Officer says the write-off must first be set against the provision account and only the excess is deductible. Where does that come from, and does it reach non-rural debts?
It comes from three places that must be read together. The proviso to s.36(1)(vii) says that where clause (viia) applies to the assessee, the deduction for a bad debt written off is limited to the amount by which the debt exceeds the credit balance in the provision for bad and doubtful debts account made under clause (viia). Section 36(2)(v) adds a condition precedent: where the debt relates to advances made by an assessee to whom clause (viia) applies, no deduction is allowed at all unless the assessee has debited that debt, in that previous year, to the clause (viia) provision account. Explanation 2 to clause (vii), inserted by section 7 of the Finance Act, 2013 with effect from 1 April 2014, then declares that for the purposes of that proviso and of s.36(2)(v) the account referred to is "only one account" and that it "shall relate to all types of advances, including advances made by rural branches". Whether Explanation 2 displaces the Supreme Court's construction in Catholic Syrian Bank for a sub-clause (a) bank is contested and is dealt with separately in this library.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text), reported as Income-tax Act, 1961, s.36(1)(vii) with its provisos and Explanations and s.36(2)(v), as printed on the departmental Year 2025 edition (incometaxindia.gov.in/w/section-36-64) and the Year 2024 (No. 1) edition (/w/section-36-62); Explanation 2 as inserted by section 7 of the Finance Act, 2013 with effect from 1 April 2014. It bears on section 36(1)(vii), section 36(1)(viia), section 36(2), section 36(2)(v), section 145(2) of the Income Tax Act 1961, in Deductions & Disallowances, How Tax Law Is Read and Assessment & Scrutiny matters.
This is the single most litigated interaction in bank taxation, and the money is large. Three practical points. First, s.36(2)(v) is a book-entry condition, not a computational one: a bank that never debited the written-off debt to the clause (viia) provision account in that previous year fails at the threshold, whatever the arithmetic. Second, the proviso does not deny the write-off; it reduces it by the credit balance already allowed as a provision, and it exists to stop the same rural advance being relieved twice. Third, Explanation 2 was Parliament's answer to Catholic Syrian Bank Ltd v. CIT, and it does its work most obviously on assessees under sub-clauses (b), (c) and (d) — a foreign bank, a public financial institution, a State financial corporation, a State industrial investment corporation or an NBFC — which have no rural branches at all and could otherwise have argued that the proviso was spent on them. Whether it also reaches the non-rural bad debts of a sub-clause (a) bank has divided the Revenue from the Tribunal, and a practitioner must know which side of that line his client's year and sub-clause fall on. Note also the second proviso to clause (vii), which deals with a debt taken into account under an income computation and disclosure standard notified under s.145(2) without being recorded in the accounts: that debt is allowed in the year it becomes irrecoverable and is deemed to have been written off in the accounts. Finally, keep the vocabulary straight: the "provision" in clause (viia) is a TAX allowance capped by percentages in the Income-tax Act; the provisioning a bank makes under the Reserve Bank of India's prudential norms is a regulatory obligation and is not what the proviso measures.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Clause (vii) of section 36(1) allows, "subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year". Its first proviso reads: "Provided that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause". Its second proviso deals with a debt taken into account in computing income of the previous year in which it becomes irrecoverable, or of an earlier previous year, on the basis of income computation and disclosure standards notified under s.145(2) without being recorded in the accounts: such a debt is allowed in the previous year in which it becomes irrecoverable and is deemed to have been written off as irrecoverable in the accounts for the purposes of the clause. Explanation 1 declares that a bad debt written off as irrecoverable in the accounts does not include any provision for bad and doubtful debts made in the accounts. Explanation 2 declares, for the removal of doubts, that for the purposes of the proviso to clause (vii) and of clause (v) of sub-section (2), "the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause (viia) and such account shall relate to all types of advances, including advances made by rural branches". Sub-section (2) opens "In making any deduction for a bad debt or part thereof, the following provisions shall apply" and contains five clauses, of which clause (v) reads: "where such debt or part of debt relates to advances made by an assessee to which clause (viia) of sub-section (1) applies, no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause." Section 7 of the Finance Act, 2013 provides that in section 36 of the Income-tax Act, in sub-section (1), with effect from the 1st day of April, 2014, in clause (vii), the Explanation shall be numbered as Explanation 1 and after it Explanation 2 shall be inserted in the terms set out above.
Not applicable — this entry states statutory text, not a holding.
Not applicable — this entry states statutory text, not a court's reasoning.
Explanation 2.—For the removal of doubts, it is hereby clarified that for the purposes of the proviso to clause (vii) of this sub-section and clause (v) of sub-section (2), the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause (viia) and such account shall relate to all types of advances, including advances made by rural branches;
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Handle my notice → Ask a CA on WhatsAppIt comes from three places that must be read together. The proviso to s.36(1)(vii) says that where clause (viia) applies to the assessee, the deduction for a bad debt written off is limited to the amount by which the debt exceeds the credit balance in the provision for bad and doubtful debts account made under clause (viia). Section 36(2)(v) adds a condition precedent: where the debt relates to advances made by an assessee to whom clause (viia) applies, no deduction is allowed at all unless the assessee has debited that debt, in that previous year, to the clause (viia) provision account. Explanation 2 to clause (vii), inserted by section 7 of the Finance Act, 2013 with effect from 1 April 2014, then declares that for the purposes of that proviso and of s.36(2)(v) the account referred to is "only one account" and that it "shall relate to all types of advances, including advances made by rural branches". Whether Explanation 2 displaces the Supreme Court's construction in Catholic Syrian Bank for a sub-clause (a) bank is contested and is dealt with separately in this library. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 36(1)(vii), section 36(1)(viia), section 36(2), section 36(2)(v), section 145(2) of the Income Tax Act 1961. It is reported as Income-tax Act, 1961, s.36(1)(vii) with its provisos and Explanations and s.36(2)(v), as printed on the departmental Year 2025 edition (incometaxindia.gov.in/w/section-36-64) and the Year 2024 (No. 1) edition (/w/section-36-62); Explanation 2 as inserted by section 7 of the Finance Act, 2013 with effect from 1 April 2014. This is the single most litigated interaction in bank taxation, and the money is large. Three practical points. First, s.36(2)(v) is a book-entry condition, not a computational one: a bank that never debited the written-off debt to the clause (viia) provision account in that previous year fails at the threshold, whatever the arithmetic. Second, the proviso does not deny the write-off; it reduces it by the credit balance already allowed as a provision, and it exists to stop the same rural advance being relieved twice. Third, Explanation 2 was Parliament's answer to Catholic Syrian Bank Ltd v. CIT, and it does its work most obviously on assessees under sub-clauses (b), (c) and (d) — a foreign bank, a public financial institution, a State financial corporation, a State industrial investment corporation or an NBFC — which have no rural branches at all and could otherwise have argued that the proviso was spent on them. Whether it also reaches the non-rural bad debts of a sub-clause (a) bank has divided the Revenue from the Tribunal, and a practitioner must know which side of that line his client's year and sub-clause fall on. Note also the second proviso to clause (vii), which deals with a debt taken into account under an income computation and disclosure standard notified under s.145(2) without being recorded in the accounts: that debt is allowed in the year it becomes irrecoverable and is deemed to have been written off in the accounts. Finally, keep the vocabulary straight: the "provision" in clause (viia) is a TAX allowance capped by percentages in the Income-tax Act; the provisioning a bank makes under the Reserve Bank of India's prudential norms is a regulatory obligation and is not what the proviso measures. If it applies to you, the first step is this: Check s.36(2)(v) first. Ask for the ledger showing that the written-off debt was debited, in that previous year, to the provision for bad and doubtful debts account made under clause (viia). If it was not, the deduction fails before any percentage question arises.
Clause (vii) of section 36(1) allows, "subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year". Its first proviso reads: "Provided that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause". Its second proviso deals with a debt taken into account in computing income of the previous year in which it becomes irrecoverable, or of an earlier previous year, on the basis of income computation and disclosure standards notified under s.145(2) without being recorded in the accounts: such a debt is allowed in the previous year in which it becomes irrecoverable and is deemed to have been written off as irrecoverable in the accounts for the purposes of the clause. Explanation 1 declares that a bad debt written off as irrecoverable in the accounts does not include any provision for bad and doubtful debts made in the accounts. Explanation 2 declares, for the removal of doubts, that for the purposes of the proviso to clause (vii) and of clause (v) of sub-section (2), "the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause (viia) and such account shall relate to all types of advances, including advances made by rural branches". Sub-section (2) opens "In making any deduction for a bad debt or part thereof, the following provisions shall apply" and contains five clauses, of which clause (v) reads: "where such debt or part of debt relates to advances made by an assessee to which clause (viia) of sub-section (1) applies, no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause." Section 7 of the Finance Act, 2013 provides that in section 36 of the Income-tax Act, in sub-section (1), with effect from the 1st day of April, 2014, in clause (vii), the Explanation shall be numbered as Explanation 1 and after it Explanation 2 shall be inserted in the terms set out above. It was decided by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Not applicable — this entry states statutory text, not a holding.
Not applicable — this entry states statutory text, not a court's reasoning. In the words reproduced by the source cited on this page: "Explanation 2.—For the removal of doubts, it is hereby clarified that for the purposes of the proviso to clause (vii) of this sub-section and clause (v) of sub-section (2), the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause (viia) and such account shall relate to all types of advances, including advances made by rural branches;"
It was decided by the CBDT Circulars & Instructions and is reported as Income-tax Act, 1961, s.36(1)(vii) with its provisos and Explanations and s.36(2)(v), as printed on the departmental Year 2025 edition (incometaxindia.gov.in/w/section-36-64) and the Year 2024 (No. 1) edition (/w/section-36-62); Explanation 2 as inserted by section 7 of the Finance Act, 2013 with effect from 1 April 2014. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 36(1)(vii), section 36(1)(viia), section 36(2), section 36(2)(v), section 145(2), 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 cuts both ways and is cited by both sides. Not applicable — this entry states statutory text, not a holding. It arises in Deductions & Disallowances, How Tax Law Is Read and Assessment & Scrutiny matters, on section 36(1)(vii), section 36(1)(viia), section 36(2), section 36(2)(v), section 145(2) of the Income Tax Act 1961, and was decided by Not applicable — statutory text. 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. Then apply the proviso: take the credit balance in the clause (viia) provision account and allow the write-off only to the extent it exceeds that balance. Establish which lettered sub-clause of clause (viia) your client is in. For sub-clauses (b), (c) and (d) the Explanation 2 point is not seriously arguable; for sub-clause (a) it is, and the Bangalore Tribunal's decision in Karnataka Bank is the authority to take to the Commissioner (Appeals). Check the assessment year against 1 April 2014. Explanation 2 has effect from that date and applies from AY 2014-15; for an earlier year it is not in the statute at all and Catholic Syrian Bank governs on its own terms. Distinguish the write-off from the provision in the accounts. Explanation 1 to clause (vii) is express that a bad debt written off as irrecoverable does not include a provision for bad and doubtful debts, so a mere provision is not a write-off however it is labelled. If the debt was recognised only under an ICDS notified under s.145(2) and never entered in the books, take the second proviso to clause (vii) rather than arguing about the accounts.
Still good law. The proviso, Explanation 1, Explanation 2 and s.36(2)(v) were transcribed from two departmental editions, Year 2025 and Year 2024 (No. 1), which agree word for word, and Explanation 2 additionally matches the text enacted by section 7 of the Finance Act, 2013. What the words MEAN for a bank taxed under sub-clause (a) of clause (viia) is a live dispute and is not settled by this entry: see the separate entry on Karnataka Bank Ltd v. DCIT. I did not carry out any survey of judicial treatment of the proviso beyond the four judgments read for this batch, and I did not read any Finance Act later than 2017 for this clause. 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.
The library already holds Catholic Syrian Bank Ltd v. CIT (Supreme Court, 17 February 2012) and Vijaya Bank v. CIT under their own entries, and I have not duplicated them; this entry is confined to the text of the proviso, of s.36(2)(v) and of Explanation 2, and to the instrument that inserted Explanation 2. Explanation 2 was dated from section 7 of the Finance Act, 2013 itself. (An earlier note on this slice said departmental amendment footnotes cannot be retrieved at all; that is not so — the numbered footnote lists do come down when demanded by number — but the live Year 2025 edition of section 36 carries no footnote marker inside clause (vii), so the Act text remains the source here.) `decided_on` is null rather than a commencement date because this entry states three provisions with different commencements; Explanation 2 commenced on 1 April 2014. I did not read the Finance Act, 2013 in full; I read its section 7 as a standalone document. The Memorandum explaining the Finance Bill 2013 and CBDT's Explanatory Note of 24 January 2014 (F. No. 142/24/2013-TPC) are both reproduced at length inside the Bangalore Tribunal's order in Karnataka Bank Ltd v. DCIT, and I have read them only there, not on a CBDT page. 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.
Not applicable — this entry states statutory text, not a holding.
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The AO wants proof my debt is actually irrecoverable before allowing the bad debt write-off. Is that right?
Can the CBDT use ICDS notified under s.145(2) to override a Supreme Court or High Court decision on how income is computed?
My employee embezzled money from the business bank account. Can I write that off for tax?
I debited the bad debt to the profit and loss account and reduced debtors in the balance sheet, but did not close each debtor's ledger account — is that an actual write-off under section 36(1)(vii)?