Bad debts allowable as Deduction u/s 36(1)(vii) of Income Tax Act: ITAT allows Bank of Baroda's Plea [Read Order]

The Income Tax Appellate Tribunal (ITAT), Bangalore bench has held that bad debts are allowable as a deduction under section 36(1)(vii) of the Income Tax Act, 1961.

 M/s. Bank of Baroda, the assessee is a leading bank in Karnataka has filed its return of income on declaring total income at ‘Nil’. The assessee filed revised income by declaring total income at Nil by making an additional claim of Rs.200/- crores under Section 36(1)(vii) of the Income Tax Act, 1961 (the Act).

Notices under Section 142(1) were also issued on various dates along with questionnaires calling for various details to verify the claims made by the assessee in the return of income. After hearing the assessee, the assessment was completed by determining total income at Rs.1750,77,68,383/-. On appeal, the CIT(A) granted partial relief to the assessee vide order dated 31.12.2018.

The assessee has claimed a sum of Rs.14.96 crores as bad debts written off in the computation of income under section. 36(1)(vii) of the Act.  It was noticed from the P&L account that nowhere the bad debt was debited. 

As per the P&L account, the assessee bank has debited a sum of Rs.819.62 crores as provisions and contingencies which included provision for NPA of Rs.800.22 crores.  The entire provisions and contingencies were added back while computing the income.   In the computation of income, the assessee has claimed bad debts written off of a sum of Rs.712,36,87,935  and claimed as deduction under section. 36(1)(vii)

The AO noted that the deduction claimed is in addition to the deduction claim of Rs.14.96 crores under section 36(1)(viia) of the Act.  The AO observed that similar deductions claimed by the assessee in the earlier assessment years also. The assessee was issued show cause notice for substantiating the claim of bad debts written off with relevant evidence.

The assessee filed written submissions on different dates explaining the deduction claimed under Section 36(1)(vii) of the Income Tax Act for write off of advances of non-rural branches of the Bank which includes debts at Head Office as well as branches and the assessee further submitted that the provisions made by the assessee as well as  bad debts written off are in consonance with RBI guidelines for preparation and finalisation of accounts. 

The AO allowed the bad debt claim of Rs.14.96 crores under Section 36(1)(vii) of the Income Tax Act which was actually debited to the P&L account as bad debts written off.  On appeal, the CIT(A) upheld the order of the AO. 

In the case of Karnataka Bank Ltd.(supra), the coordinate bench held “it will be evident that assessee, though, has written off in the books of account an amount of Rs. 210.74 crore, but, in the computation of total income, the actual deduction claimed under section 36(1)(vii) is Rs. 209.08 crore representing bad debts written off relating to non-rural/urban advances. The balance amount of bad debts relating to rural advances was not claimed as deduction by assessee in terms with the proviso to section 36(1)(vii) as it has not exceeded the provision for bad and doubtful debts relating to rural advances created under section 36(1)(viia). Both AO and ld. CIT(A) have misconstrued the statutory provisions while observing that proviso to section 36(1)(vii) would also apply in case of bad debts relating to non-rural advances. The Hon'ble Supreme Court in case of Catholic Syrian Bank Vs. CIT (supra) while analyzing provisions of section 36(1)(vii) and 36(1)(viia) have observed that section 36(1)(viia) applies only to rural advances. The observations made by Hon'ble Apex Court in this regard in paras 26 & 27 of the judgment is extracted hereunder for convenience. “

The department submitted that the Apex court has admitted the SLP filed by the revenue but the status of the same could not be furnished by the department, accordingly, 

In light of the decisions, the Coram comprising Shri George George K., Judicial Member and Shri Laxmi Prasad Sahu, Accountant Member directed the AO to delete the addition made under Section 36(1)(vii) of the Income Tax Act, 1961 and allowed the appeal.

To Read the full text of the Order CLICK HERE

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