Bad Debt Income Tax Deduction for Rural Branch Advances to be Computed on Aggregate Average of Monthly Outstanding Balances: Madras HC [Read Order]

The Madras High Court has dismissed two appeals filed by the Income Tax Department, holding that the deduction for provision for bad and doubtful debts under Section 36(1)(viia) of the Income Tax Act, 1961, must be computed on the basis of the aggregate average of monthly outstanding advances of rural branches.

The appeals arose from assessment proceedings for the Assessment Year 2010-11 relating to the respondent-assessee M/s The Madurai District Central Co-operative Bank Limited. The Revenue had challenged the ITAT’s orders dated 2 September 2014, contending that the deduction under Section 36(1)(viia) should be calculated only on the incremental advances made during the year, and not on the cumulative outstanding advances of rural branches at the end of each month.

The substantial questions of law framed by the High Court concerned the interpretation of Rule 6ABA of the Income-tax Rules, 1962, read with Section 36(1)(viia), particularly whether “aggregate average advances” should be computed by taking the outstanding advances of each rural branch at the end of every month of the previous year, or by considering only the advances made during the relevant year.

V. Mahalingam, Senior Standing Counsel appeared for the Revenue while N. V. Balaji appeared for the respondent-assessee in the matter.

Counsel for either side fairly conceded before the Court that the controversy was covered by the decision of the Supreme Court in Catholic Syrian Bank v. Commissioner of Income-Tax (2012), as well as by the judgment of the Madras High Court in Commissioner of Income-Tax v. City Union Bank (2015), which had followed earlier rulings, including the Kerala High Court’s decision in South Indian Bank v. CIT (2003).

The Division Bench comprising Justice Anita Sumanth and Justice Mummineni Sudheer Kumar noted that the law on the issue was well settled.

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The Court referenced the Kerala High Court decision in South Indian Bank (supra), where it was held that the scope of the proviso to Section 36(1)(vii) has to be ascertained from a cumulative reading of clauses (vii) and (viia) of Section 36(1) and clause (v) of Section 36(2).

The Kerala High Court explained that the intention of the Legislature was only to ensure that a double benefit in respect of the same bad debt is not granted to a scheduled bank. It was held that while a bank is entitled to deduction of bad debts relating to advances made by urban branches written off in the books, in respect of rural branch advances, the deduction under Section 36(1)(viia) is to be worked out with reference to the cumulative advances outstanding, subject to the limitation that the proviso operates only to prevent double deduction for the same debt.

Accordingly, the Madras High Court upheld the ITAT’s method of computation and answered the substantial questions of law in favour of the assessee and against the Revenue, dismissing both appeals.

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