Provision for Bad Debts – Banks get IT Relief from Supreme Court
Findings recorded in the earlier assessment years not binding on Department for subsequent years
A Larger Bench of the Supreme Court headed by the Chief Justice on Friday allowed a major relief to certain private banks from Kerala. The issue before the Supreme Court was whether a bank is eligible to claim a deduction for bad debts u/s 36(1)(vii) in respect of its (rural & urban) advances and also claim a provision for bad and doubtful debts u/s 36(1)(viia) in respect of its rural advances under the Income Tax Act.
The Supreme Court held that the provisions of Sections 36(1) (vii) and 36(1)(viia) of the Act are distinct and independent items of deduction and operate in their respective fields. The bad debts written off in debts, other than those for which the provision is made under clause (viia), will be covered under the main part of Section 36(1)(vii), while the proviso will operate in cases under clause (viia) to limit deduction to the extent of difference between the debt or part thereof written off in the previous year and credit balance in the provision for bad and doubtful debts account made under clause (viia). The proviso to Section 36(1)(vii) will relate to cases covered under Section 36(1)(viia) and has to be read with Section 36(2)(v) of the Act. Thus, the proviso would not permit benefit of double deduction, operating with reference to rural loans while under Section 36(1)(vii), the assessee would be entitled to general deduction upon an account having become bad debt and being written off as irrecoverable in the accounts of the assessee for the previous year. This, obviously, would be subject to satisfaction of the requirements contemplated under Section 36(2).
While delivering the judgement, the Supreme Court also made some important pronouncements:
Findings recorded in the earlier assessment years not binding on the Department for subsequent years: Merely because the orders of the Special Bench of the ITAT were not assailed in appeal by the Department itself, this would not take away the right of the Revenue to question the correctness of the orders of assessment, particularly when a question of law is involved. There is no doubt that the earlier order of the CIT(A) had merged into the judgment of the Special Bench of the ITAT and attained finality for that relevant year. Equally, it is true that though the Full Bench of the Kerala High Court specifically overruled the Division Bench judgment of that very Court in the case of South Indian Bank (supra), it did not notice any of the contentions before and principles stated by the Special Bench of the ITAT in its impugned judgment. The question raised in the present appeal go to the very root of the matter and are questions of law in relation to interpretation of Sections 36(1)(vii) and 36(1)(viia) read with Section 36(2) of the Act. Thus, without any hesitation, Supreme Court rejected the contention of the appellant banks that the findings recorded in the earlier assessment years 1991-1992 to 1993- 1994 would be binding on the Department for subsequent years as well.
Double Benefit? Merely because the Department has some apprehension of the possibility of double benefit to the assessee, this would not by itself be a sufficient ground for accepting its interpretation. Furthermore, the provisions of a section have to be interpreted on their plain language and could not be interpreted on the basis of apprehension of the Department.
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