The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) has granted relief to Canara Bank by deleting the disallowance under Section 36(1)(vii) of the Income Tax Act, 1961 holding that bad debt written off should be first adjusted against the credit balance and only excess could be claimed as deduction.
The assessor, Canara Bank, was a public sector bank. For AY 2011-12, the AO noted that the assessee had claimed deduction of bad debts under Section 36(1)(vii) Income Tax Act without actually writing off the debts as irrecoverable in the individual loan accounts of the debtors concerned. The AO found that majority of the write-off was Prudential Write Off (PWO) at the Head Office level with a view to create provisions for Non-Performing Assets (NPAs) in the books of accounts as per RBI Guidelines.
The AO further noted that the assessee did not charge the amount of bad debts written off to the provision for bad and doubtful debts account, even though there was a sufficient credit balance available in the provisions created for the very purpose.
The AO relied on the first proviso to Section 36(1)(vii) of the Income Tax Act which expressly stated that the claim of bad debt written off should be admissible, only to the extent the same exceeds the credit balance in provisions for bad and doubtful debts.
Ananthan S, on behalf of the assessee submitted that, amount written off was reduced from the loans and advances of the bank relying on decisions in Vijaya Bank v. CIT and UCO Bank v. CIT. It was submitted that the bad debt written off should be first adjusted against the credit balance in the provisions account and only the excess can be claimed as deduction.
Neera Malhotra, on behalf of the revenue submitted that provisions of Section 36(1)(viia) of the Income Tax Act were applicable to the assessee bank and deduction had to be considered in terms of proviso to Section 36(1)(vii) read with Section 36(2) of the Income Tax Act and accordingly the same needed to be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account created under Section 36(1) (viia)Income Tax Act.
The Division Bench of George K., (Judicial Member) and Laxmi Prasad Sahu, (Accountant Member) deleted the addition made under Section 36(1)(vii) Income Tax Act and allowed the ground for AYs 2011-12 and 2012-13 noticing similar decisions in assessee’s own case which had rendered in favour of the assessee.
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