Standard Assets Eligible for Deduction u/s 36(1)(viia): ITAT Quashes Income Tax Proceedings against Bajaj Finance [Read Order]

The Income Tax Appellate Tribunal (ITAT), Pune Bench, upheld that standard assets are eligible for deduction under section 36(1)(viia) and quashed proceedings initiated against Bajaj Finance.

The appellant, Bajaj Finance Limited, is a Non-Banking Financial Company (NBFC) registered under the Companies Act, 1956 and is engaged in the business of providing loans and advances. On 30.10.2019, the appellant filed its return of income declaring ₹5345,39,24,170 and later revised the return to declare income as ₹5301,77,46,430 on 30.11.2020.

The Assessment Officer (AO) completed the assessment under section 143 read with section 144B of the Income Tax ACT, 1961 on 29.09.2021 and determined the total income of the appellant as ₹5732,80,60,408 by making additions.

The respondent, The Principal Commissioner of Income Tax (PCIT), examined the record and observed that certain issues had not been examined by the AO. Accordingly, a show cause notice was issued under section 263 on the ground that the assessment order was erroneous and prejudicial to the interests of the Revenue.

The appellant submitted relevant documents and explanations before the PCIT. However, not being satisfied with the submissions of the appellant, the PCIT held that the assessment order passed by the AO was erroneous and prejudicial to the interests of the Revenue.

PCIT partly set aside the assessment order for the limited purpose of examining the nature of assets and the quantum of deduction admissible under Section 36(1)(viia) of the Act and the related party transactions under Section 40A(2)(b) of the Act.

The appellant challenged the validity of the proceedings initiated under Section 263 of the Act. The appellant also challenged the findings relating to the deduction claimed under Section 36(1)(viia) and the applicability of Section 40A(2)(b) in respect of related party transactions.

The counsel for the appellant, Percy Pariwalla, relying on the ITO vs. Latur District Central Co-Op Bank Ltd (2025) submitted that the appellant is eligible for deduction for standard assets under section 36(1)(viia) of the Act. It was further contended that in the set-aside proceedings, the AO had already examined the issue and allowed the claim.

The counsel represented for Revenue Department, Amol Khairnar, submitted that the AO has not conducted any enquiry while allowing claim on standard assets under section 36(1)(viia). It was also contended that AO had failed to properly verify the related party transactions under Section 40A(2)(b).

R.K.Panda, vice president and Vinay Bhamore, Judicial member, noted that in the order dated 13.03.2025, the AO had not made any addition in respect of payments made to related parties under section 40A(2)(b). Therefore, the dispute was confined to the allowability of deduction under Section 36(1)(viia) of the Act.

The tribunal noted that the assessee is eligible for deduction in respect of provision for bad and doubtful debts for the purpose of section 36(1)(viia) of the Act which includes the standard assets as held in various decisions of the Co-ordinate Bench of the Tribunal.

Accordingly, following the order of the Co-ordinate Bench in the assessee’s own case for the preceding assessment year, the Tribunal quashed the proceedings initiated under Section 263 by the PCIT.

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