Section 36(1)(viia)

Section 36(1)(viia) — the law in short

What the courts have decided on section 36(1)(viia), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Catholic Syrian Bank Ltd v CIT Supreme CourtHelps taxpayer
  My bank has a section 36(1)(viia) provision for rural advances. Does that provision cut down my deduction for urban bad debts actually written off under section 36(1)(vii)?
  No. The Supreme Court held that the deduction under section 36(1)(viia) for a provision against rural advances is distinct and independent of the deduction under section 36(1)(vii) for a bad debt actually written off. The proviso to clause (vii), which limits the write-off deduction to the excess over the credit balance in the clause (viia) account, exists only to prevent double deduction, and can operate only where that risk exists - that is, in respect of rural advances. Where the debts written off arise out of urban advances, the allowance is not affected by the proviso at all. The banks' appeals were allowed and the Revenue's dismissed.
• M/s Ashok Leyland Finance Ltd v DCIT (Madras High Court) — a non-banking financial company cannot claim a deduction for a provision against non-performing assets beyond the amount the statute recognises High CourtHelps departmentNo later treatment found
  My client is an NBFC that has made a provision against non-performing assets in accordance with the Reserve Bank of India's directions. Can it deduct that provision, or claim it as a business loss if it is not a bad debt?
  The Madras High Court held it cannot claim beyond the statutory limit and dismissed the appeal. It reasoned that section 36(1)(viia) provides a special dispensation for named institutions, that a non-banking financial company within the meaning of section 45-I of the Reserve Bank of India Act 1934 is included in that list, and that the provision for bad and doubtful debts made by such a company cannot exceed five per cent of the total income computed before any deduction under section 36 and Chapter VI-A. Its conclusion is stated in one sentence: the appellant cannot claim a deduction beyond the amount that is statutorily recognised. It also answered against the assessee the questions on diminution in the value of investments and on diminution in the value of repossessed stock of vehicles, the latter by reference to a separate order passed the same day in a connected appeal.
• 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 taxpayerNo later treatment found
  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.
• Haryana State Industrial Development Corporation v CIT (Punjab and Haryana High Court) — the provision made in the current year itself sits in the credit balance and reduces the bad-debt write-off High CourtHelps departmentNo later treatment found
  The Assessing Officer has reduced my client's bad-debt claim by the s.36(1)(viia) provision created in the SAME year, not just by the opening balance. Is the current year's provision part of the credit balance for the purposes of the proviso to s.36(1)(vii)?
  On this authority, yes. The Punjab and Haryana High Court dismissed a State industrial development corporation's appeal and upheld the Tribunal's finding that the provision for bad and doubtful debts created during the year under section 36(1)(viia), of Rs.19,77,535, had to be reduced from the actual bad debts claimed under section 36(1)(vii) by reason of the proviso. The Court's own statement of the law is that to the extent to which the provision for bad and doubtful debts has been allowed under section 36(1)(viia), there can be no deduction under section 36(1)(vii), in view of section 36(2)(v). It held the Tribunal's finding to be in conformity with the proviso to section 36(1)(vii) and with section 36(2)(v) and not shown to be perverse or illegal, and dismissed the appeal.
• The Karnataka Bank Ltd v DCIT (ITAT Bangalore) — Explanation 2 to s.36(1)(vii) brings in the clause (b) to (d) assessees; it does not make a clause (a) bank set its non-rural write-off against the rural provision ITATHelps taxpayer
  For assessment year 2014-15 onwards the Assessing Officer says Explanation 2 to s.36(1)(vii) requires my client bank to set its NON-RURAL bad debts against the s.36(1)(viia) provision account before claiming anything. Is that right?
  The Bangalore Tribunal held it is not right for a bank claiming under sub-clause (a) of s.36(1)(viia). It construed Explanation 2, inserted by the Finance Act 2013 with effect from 1 April 2014, as operating in respect of sub-clause (a) only in relation to rural advances, and in respect of sub-clauses (b) to (d) — a foreign-incorporated bank, a public financial institution or State financial corporation or State industrial investment corporation, and a non-banking financial company — for advances given by both rural and non-rural branches. Its reason was that the Supreme Court in Catholic Syrian Bank had held sub-clause (viia)(a) to apply to rural advances only, that Parliament did not amend sub-clause (a), and that an Explanation inserted in clause (vii) does not override that construction. It therefore directed the Assessing Officer to allow the bad debts relating to non-rural branches under s.36(1)(vii) without adjusting them against the provision account.
• 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.
• Statutory position — s.43D: interest on a bad or doubtful debt of a bank, financial institution or NBFC is taxed on credit or receipt, not on accrual, and what Rules 6EA and 6EB prescribe CBDT Circulars & InstructionsCuts both ways
  My client is a bank and has stopped accruing interest on non-performing accounts under RBI norms, but the Assessing Officer has added the interest on the mercantile basis. Is there a provision that displaces accrual?
  Yes. Section 43D opens "Notwithstanding anything to the contrary contained in any other provision of this Act" and provides that, for the institutions it names, income by way of interest in relation to such categories of bad or doubtful debts as may be PRESCRIBED — having regard to the guidelines issued by the Reserve Bank of India — is chargeable to tax in the previous year in which it is credited to the profit and loss account, or in which it is actually received, whichever is earlier. It therefore displaces the accrual basis for that interest and nothing else. The institutions named on the current departmental edition are a public financial institution, a scheduled bank, a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, a State financial corporation, a State industrial investment corporation, and "such class of non-banking financial companies as may be notified by the Central Government in the Official Gazette in this behalf". The prescribed categories are in Rule 6EA of the Income-tax Rules, 1962.
• Statutory position — s.94B: the thirty per cent of EBITDA cap on interest paid to a non-resident associated enterprise, the one crore gateway, the guarantee proviso that catches third-party debt, the eight-year carry forward, and the three carve-outs in sub-section (3) — banking and insurance, a notified class of NBFC from 1 April 2024, and an IFSC Finance Company from 1 April 2025 CBDT Circulars & InstructionsCuts both ways
  The officer has disallowed part of my interest under s.94B. Does the section even apply to me, how is the excess actually computed, and can I carry the disallowance forward?
  Section 94B(1) applies where an Indian company, or the permanent establishment of a foreign company in India, being the borrower, incurs interest or expenditure of a similar nature EXCEEDING ONE CRORE RUPEES, deductible under "Profits and gains of business or profession", in respect of any debt issued by a non-resident which is an associated enterprise of the borrower; to that extent the interest is not deductible so far as it arises from "excess interest". Sub-section (2) defines excess interest as "an amount of total interest paid or payable in excess of thirty per cent of earnings before interest, taxes, depreciation and amortisation of the borrower in the previous year or interest paid or payable to associated enterprises for that previous year, WHICHEVER IS LESS". The proviso to sub-section (1) extends the section to third-party debt: where the lender is not an associated enterprise but an associated enterprise "either provides an implicit or explicit guarantee to such lender or deposits a corresponding and matching amount of funds with the lender", the debt is deemed to have been issued by an associated enterprise. Sub-section (4) allows the undeducted interest to be carried forward and set off against business profits, subject to the same sub-section (2) ceiling, for not more than EIGHT assessment years immediately succeeding the year in which the excess was first computed. Sub-section (3) takes the borrower out of the section where the Indian company or the permanent establishment is engaged in the business of banking or insurance — and also, by words inserted by Act No. 15 of 2024 with effect from 1 April 2025, where it is "a Finance Company located in any International Financial Services Centre", and, by words inserted by the Finance Act, 2023 with effect from 1 April 2024, "or such class of non-banking financial companies as may be notified by the Central Government in the Official Gazette in this behalf", no such class having been notified so far as could be established. Sub-section (1A), inserted by Act No. 12 of 2020 with effect from 1 April 2021, is a different and often confused relief: it takes out interest on a debt issued by a LENDER which is a permanent establishment in India of a non-resident engaged in the business of banking.
• Statutory position — the proviso to s.36(1)(vii), s.36(2)(v) and Explanation 2: how a bank's bad-debt write-off is set against the s.36(1)(viia) provision account CBDT Circulars & InstructionsCuts both ways
  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.

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.