Section 36(2)

Section 36(2) — the law in short

What the courts have decided on section 36(2), 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.
• Vijaya Bank v CIT Supreme CourtHelps taxpayer
  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)?
  Yes. The Supreme Court held on 15 April 2010 that debiting the profit and loss account and simultaneously reducing loans and advances or debtors on the asset side, so that the year-end figure is shown net of the provision, is an actual write-off. What the Explanation inserted with effect from 1 April 1989 excludes is a debit to the profit and loss account matched by a credit to current liabilities and provisions — that is a provision, not a write-off. There is no further requirement to close the individual account of each debtor. The Assessing Officer can call for those accounts if he has reason to believe the deduction is being claimed twice.
• Principal Commissioner of Income Tax-6 v Nalwa Sons Investment Ltd High CourtHelps taxpayerNo later treatment found
  My company deals in shares as part of its business, but its income comes mainly from lending. The Commissioner (Appeals) has treated the share loss as a speculation loss under the Explanation to section 73. Is the company excepted?
  Yes, if its total income mainly consists of income derived from the granting of loans and advances. The Delhi High Court held that the Tribunal was textually right to find the company within the exception carved out in the parenthesis of the Explanation to s.73, so the Commissioner (Appeals) fell into error in treating the reported loss as pertaining to a speculative transaction, and no question of law arose.
• CIT v Shreyas S. Morakhia High CourtHelps taxpayer
  I am a share broker. I bought shares for a client, he never paid, and I have written the whole amount off. The assessing officer allows me only the brokerage and says the value of the shares was never my income, so it was never my debt. Is that right?
  No. The Bombay High Court held that a share broker is entitled to deduction of the whole of the irrecoverable amount, not merely the brokerage. The debt owed by the client is a single debt arising out of a single transaction, and it comprises the value of the shares purchased on the client's behalf as well as the brokerage charged on the purchase. Section 36(2)(i) requires that the debt, or part of it, has been taken into account in computing the income of the assessee. The brokerage is credited to the profit and loss account and is assessed as business income, so part of the debt has been taken into account, and the section is satisfied for the whole of the debt. The Court pointed to the bill itself, which shows the rate, the quantity and the total value of the shares as well as the brokerage, and held that once the brokerage has been taxed as business income it is evident that within the meaning of section 36(2)(i) the debt or part thereof has been taken into account in computing the income of the assessee. The appeal was disposed of by answering the question of law in the affirmative and in favour of the assessee, with no order as to costs. One thing was left over: the value of any shares still in the broker's hands has to be adjusted against what is receivable from the client.
• 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.
• 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 taxpayerNo later treatment found
  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.
• Bharti Bhushan Jindal v ACIT ITATHelps departmentValidity unconfirmed
  I lend money on the side and offer the interest as income from other sources. Four borrowers have not repaid and I have written the principal off. Can I deduct it under s.57(iii), or as a bad debt?
  Neither. The Chandigarh Bench held that the principal advanced is a capital outflow, and s.57(iii) expressly excludes expenditure in the nature of capital expenditure, so a write-off of the principal cannot be deducted from interest assessed under s.56. The bad-debt route under s.36 also failed, because the amount written off had never been taken into account in computing income in any earlier year — only the interest had been offered.
• 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.