What the courts have decided on section 36(2)(v), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.
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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 departmentValidity unconfirmed
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.
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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 taxpayerValidity unconfirmed
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.
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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.