Section 36(1)(viii)

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

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

• 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.36(1)(viii): the special reserve, the twenty per cent limit, the twice-the-paid-up-capital ceiling, and the s.41(4A) charge when the reserve is drawn down CBDT Circulars & InstructionsCuts both ways
  My client is a housing finance company and has created a special reserve. How much is deductible under s.36(1)(viii), what caps it, and what happens if the reserve is later withdrawn?
  Section 36(1)(viii) allows a "specified entity" a deduction for a special reserve created and maintained by it, of an amount not exceeding twenty per cent of the profits derived from an "eligible business" computed under the head "Profits and gains of business or profession" (before any deduction under this clause) and actually carried to that reserve account. A proviso caps the cumulative benefit: where the aggregate of the amounts carried to the reserve account from time to time exceeds twice the amount of the paid up share capital and of the general reserves of the specified entity, no allowance is made in respect of the excess. And section 41(4A) supplies the sting — where the deduction has been allowed, any amount subsequently withdrawn from the special reserve is deemed to be profits and gains of business or profession and is charged to tax in the year of withdrawal, and by the Explanation to that sub-section it is charged even if the business is no longer in existence.

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.