IMPORTANT POINT
Deductions for bad debts and provisions for bad debts under the Income Tax Act are independent, allowing separate claims without double deduction issues.

JUDGMENT :

G.S. Kulkarni, J.

1. These are two appeals filed by the assessee - The United Western Bank Ltd., which was merged with the ‘Industrial Development Bank of India’. Both these appeals raise common questions of fact and law. The relevant assessment years are 1993-94 and 1994-95. We refer to the questions of law framed by the Court while admitting Income Tax Appeal No. 511 of 2024, which reads thus :

“(i) Whether on the facts and in the circumstances of the case, the Appellate Tribunal was justified in rejecting the claim of the appellant u/s. 36(1)(vii) and 36(1)(viia) aggregating to Rs.3,89,96,838/-?

(ii) Whether the Appellate Tribunal is right in law in holding in respect of amount written off by the rural branches, the difference between amount written off and doubtful debt account would be allowed without referring to the claim and calculation made by the appellant?

(iii) Whether on the fact and in the circumstances of the case, the Tribunal was justified in holding that post issue expenses of Rs.6,00,000/- on stamp duty on share certificates was capital expenditure particularly when the rights issue was in compliance with RBI’s requirements?

2. At the outset, Mr. Naniwadekar, learned counsel for the appellant has submitted that the appeals are being confined to question nos. 1 and 2. These questions are interconnected.

3. The facts in the lead appeal (Income Tax Appeal No. 511 of 2004) can be noted hereunder:-

4. The appellant is stated to be a Scheduled Commercial Bank, which has rural branches as defined in clause (ia) of Explanation to Section 36(1) (viia) of the Income-tax Act (for short “the Act”). The assessee follows the practice of writing off in its books of accounts, bad debts during the course of the year as well as making provisions on the last day of the accounting year. The provision that may be made under Section 36(1)(viia) is a percentage of the total income and another percentage of the advances made during the year, which necessarily means that it can only be computed at the end of the year. For the assessment year in question (AY 1993-94), the accounting year ended on 31 March, 1993. It is stated that there was opening balance as on 1 April, 1992 in the provision account made as per Section 36(1)(viia) of the Act, which permits the assessee to make a ‘provision’ for bad debts. It is the assessee’s case that during the previous year, the assessee actually wrote off total bad debts of Rs.4,56,71,000/- which related to the debts arising in the prior years. The assessee contended that at the end of the year, i.e., on 31 March, 1993, the assessee made fresh provision and claimed deduction under section 36(1)(viia) of Rs.1,11,79,936/-. Mr. Naniwadekar has prepared a table to indicate total bad debts written off; opening credit balance of bad debts provision; amount of bad debts claimed as deduction u/s. 36(1)(vii); provisions for bad debts made u/s. 36(1)(viia); and total deduction claimed for the assessment years 1993-94 and 1994-95. Such table is extracted hereunder:-

5. In assessing the income of the assessee, in the context of the deductions on this count as claimed by the assessee, the Assessing Officer was of the view that not only the opening balance in the ‘provision account’ at the beginning of the year should be taken into account, but also the provision made at the end of the year be reduced, along with bad debts being an amount of Rs.1,11,79,936/- and allowed only the balance amount of bad debts.

6. The assessee carried the matter to CIT(A)