Income Tax - Assessment of Banks - deductions - CBDT instructions - A contingent liability cannot constitute deductible expenditure for the purposes of Income Tax Act.
CAG has observed that while computing the income of banks under the head 'Profit and Gains of Business & Profession', deductions of large amounts under different sections are being allowed by the Assessing Officers without proper verification, leading to substantial loss of revenue.
The CBDT has instructed that
(i) Bad debts which are written off as irrecoverable in the accounts of the assessee is admissible. However, this should be allowed only if the assessee had debited the amount of such debts to the provision for bad and doubtful debt account.
(ii) While considering the claim for bad debts u/s 36(1)(vii), the assessing officer should allow only such amount of bad debts written off as exceeds the credit balance available in the provision for bad & doubtful debt account.
(iii) In cases where an assessee bank purchases securities under capital account at a price inclusive of any accrued interest, the entire purchase consideration is in the nature of capital outlay. Therefore, any interest element included in the purchase consideration is not allowable as expenditure against income accruing on those securities.
(iv) Section 14A of the Act read with rule 8D of the I.T. Rules, 1962, provides that for the purpose of computing total income under the Act, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income, which does not form part of the total income. Therefore, expenditure in respect of exempted incomes should not be allowed as deduction.
(v) Section 43B(b) of the Act envisages that deduction towards contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees is allowable in computing total income of the assessee only on actual payment basis.
(vi) Section 35DDA of the Act provides that where an assessee incurs any expenditure by way of payment of any sum to an employee at the time of his retirement in accordance with any scheme of voluntary retirement, one fifth of the amount so paid shall be deducted in computing the profit and gains of the business and the balance shall be deducted in equal instalments for each of the four immediately succeeding years. Therefore, only one-fifth of such expenditure should be allowed in each of the five years.
(vii) A contingent liability cannot constitute deductible expenditure for the purposes of Income Tax Act. Thus, putting aside of money which may become expenditure on the happening of an event would normally not constitute an allowable expenditure under the Income Tax Act.
(viii) Under the RBI guidelines and the Indian Companies Act, 1956, banks have to follow the mercantile system of accounting and prepare accounts on accrual basis. The Assessing Officers should ensure that this system is strictly followed by the Banks (in respect of all sources of income).
CBDT Instruction No. 17/2008, Dated: November 26, 2008