What the courts have decided on section 36(1)(viia)(c), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.
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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
High CourtHelps taxpayerValidity unconfirmed
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.
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DCIT v National Insurance Co. Ltd (ITAT Kolkata) — under s.44 and Rule 5 an amortised premium and an investment written off are neither expenditure nor allowance nor provision, and the unexpired-risk reserve stays out of book profit
ITATHelps taxpayerValidity unconfirmed
The Assessing Officer has disallowed my general insurance client's amortisation of premium on investments and its investments written off, and has added the reserve for unexpired risks to book profit under s.115JB. What is the limit on his power?
The Kolkata Tribunal dismissed all three of the Revenue's appeals. It upheld the Commissioner (Appeals) in deleting the disallowance of amortisation of premium paid on purchase of investments and of investments written off, on the footing that under section 44 read with Rule 5 of the First Schedule the Assessing Officer may add back only an expenditure, an allowance or a listed provision that is inadmissible under sections 30 to 43B, and an amount amortised or written off is none of those. It also upheld the Commissioner (Appeals) in holding that the reserve created for unexpired risk need not be added back in computing book profit under section 115JB, that reserve having been created not by a debit to the profit and loss account but out of the premium received, as the Insurance Act 1938 requires and as Rule 5(c) of the First Schedule and Rule 6E of the Income-tax Rules recognise.
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Statutory position — s.36(1)(viia): the provision for bad and doubtful debts, the percentage for each class of assessee, the separate rural-branch limb, and Rule 6ABA
CBDT Circulars & InstructionsCuts both ways
My client is a bank and the Assessing Officer has cut down its claim for provision for bad and doubtful debts. What exactly does section 36(1)(viia) allow, at what percentage, to which class of assessee, and how is the rural-branch figure worked out?
Section 36(1)(viia) allows a deduction for a PROVISION for bad and doubtful debts — not a write-off — and the percentage depends entirely on which of its four lettered sub-clauses the assessee falls in. Sub-clause (a) (a scheduled bank not incorporated outside India, a non-scheduled bank, or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank) carries TWO separate and cumulative limbs on TWO different bases: an amount not exceeding eight and one-half per cent of total income computed before any deduction under this clause and under Chapter VIA, PLUS an amount not exceeding ten per cent of the aggregate average advances made by the rural branches of that bank computed in the prescribed manner. Sub-clause (b) (a bank incorporated under the laws of a country outside India) is five per cent of total income; sub-clause (c) (a public financial institution, a State financial corporation or a State industrial investment corporation) is five per cent of total income; sub-clause (d) (a non-banking financial company) is five per cent of total income. Rule 6ABA prescribes the three-step arithmetic for the aggregate average advances of the rural branches.
Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.