Bad Debts Are Allowable To Banks/NBFCs Even In Absence Of Provision For Same Since Sec.36(1)(vii) & 36(1)(viia) Of IT Act Are Independent: Delhi HC

The Delhi High Court recently allowed a deduction of irrecoverable bad debts to Standard Chartered Grindlays Bank (Assessee) under Section 36(1)(vii) of the Income Tax Act, which got crystallized during the year even where no provision for bad debts was made under Section 36(1)(viia).

While stating that Section 36(1)(vii) and Section 36(1)(viia) are distinct and independent provisions, and the Income Tax Act does not allow for deduction on account of a mere provision for bad and doubtful debts in computation of taxable profits, the High Court elucidated that the legislature gave this leeway, inter alia, to banks and public financial institutions and Non-Banking Financial Companies(NBFCs) referred to, inter alia, in various sub-clauses of clause (viia) of Section 36(1), albeit, up to a specified percentage.

The Division Bench comprising of Justice Rajiv Shakdher and Justice Girish Kathpalia observed that “the flawed formula adopted by the AO would run into rough weather if the assessee’s appeal for AY 2002-03 were to be allowed; which would result in its loss return being accepted. This roundabout manner of arriving at the addition was flawed, both on facts and in law”.

Advocate Shashi M Kapila appeared for the Assessee while Revenue was represented by Advocate Aseem Chawla.

The brief facts of the case were that the Assessee filed a return declaring income of Rs.205 Cr and claimed a deduction of Rs.10.78 Cr on account of bad debt under Section 36(1)(vii) which was disallowed by the Revenue.

After considering the submission, the Bench found that there was clearly no provision made for bad debts and the Assessee can straightaway claim deduction towards irrecoverable bad debts under Section 36(1)(vii) since there is no dispute that conditions prescribed in Section 36(2) stand fulfilled.

The Bench observed that an Assessee including a scheduled bank is entitled to claim deduction of any bad debt or part thereof which is written off as irrecoverable in the relevant AY.

The Bench further observed that the first proviso to Section 36(1)(vii) applies to an Assessee to which clause (viia) applies and that is when the deduction of bad debts is restricted to the amount by which such debt exceeds the credit balance of the provision made in the books of account.

Therefore, stating that the first proviso to Section 36(1)(vii) has no applicability in the present case, the High Court concluded that the scheme of the aforementioned provisions would exclude the applicability of the first proviso appended to Section 36(1)(vii) of the Act, as there was no provision for bad debts available in the AY in issue.

Cause Title: Standard Chartered Grindlays Bank Ltd v. Assistant CIT

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