INCOME TAX

Circular 20

Dated 13/6/1969

Bad debts - Whether claims of banks should be automatically allowed in their entirety in their assessments under clause (vii) of sub-section (1)

1. A suggestion has been made to the Board that, in the case of banks, the Income-tax Officer should give full deduction for all bad and doubtful debts actually written off in the books of the banks, without any questioning, since the banks are in a better position to decide whether any of their debts are realisable or not.

2. The above suggestion was earlier examined by the Board on representations made from the Indian Chamber of Commerce, Calcutta and the Indian Banks Association itself. It was decided that it was not possible to accept the suggestion that the bad debts claimed by banks should be automatically allowed in their entirety in the assessments of the banks. The legal position was explained at that time in the replies issued by the Board to the Indian Chamber of Commerce and to the Indian Banks Association. Copies of these letters [CBR Circular No. 27(19)-IT/49, dated 2-9-1949 and CBR Circular No. 27(19)-IT/49, dated 22-3-1950 with Annexures] are enclosed for information [Annex I and Annex II].

Circular : No. 20 [F. No. 10/11/69-IT(A-II)], dated 13-6-1969.

ANNEX I - CIRCULAR DATED 2-9-1949 REFERRED TO IN CLARIFICATION

Allowances in assessing business income - Bad and doubtful debts - Bad debts of banks With reference to the correspondence ending with your Letter No. 2880, dated 18-8-1949*, I am directed to state that the questions whether a debt is a bad debt and when it became bad, are mainly questions of fact to be determined in case of dispute not by the assesse or by the exercise of any option on his part of declaring it bad but by the ITO (subject to appeal) upon a consideration of all relevant circumstances. When all the facts on which a public bank reached the decision that a particular debt (or a part of it) has become irrecoverable are placed before the Income-tax Officer, the Income-tax Officer might take a reasonable view of the evidence before reaching his finding. As far as the Board are aware, serious disputes between a public bank and the Income-tax Officers have not so far arisen in the matter of bad debts and they trust that the position will be maintained in future.

As regards the question of accepting audit certificate, the whole matter has been gone into by the Income-tax Investigation Commission and attention is invited to paragraph 206 of their Report.

*letter referred to in annex I

The Committee of the Chamber have been informed that while the Indian Companies Act and the Banking Companies Act lay down that the banks should write off or make provision for all doubtful or bad debts before ascertaining the net profits, the Income-tax Officers under section 10 of the 1922 Act, however, allow relief only in respect of such bad debts as in their estimate are irrecoverable to the extent of the amount written off. Doubtful debts are, therefore, automatically excluded from the relief. Further, Income-tax Officers, it is stated, insisted on the following information : (1) how old the debt is? (2) how it became bad? and (3) when it became bad?

As the Government are aware, banks generally write off bad debts from the current years revenue without touching the reserve fund and, therefore, it may not be possible to write off all bad debts in a single year. The banks continue to make provision each year and at suitable opportunity bad debts are written off. It is stated that Income-tax Officers often reject such claims either on the ground that they are premature or that they became bad in a previous year. Moreover, it is learnt that Income-tax Officers in interpreting recoverability are more guided by legal interpretation than facts and refuse to grant relief unless the banks can produce documentary evidence that the debts are irrecoverable or unless the debts are statute barred. It would be appreciated that it is hardly possible for the banks to get any documentary proof regarding bad debts. It is well-known that when a debt becomes unsecured or when the debtor fails to repay the debt on due date, the bank calls upon the debtor to repay the debt or in the alternative to furnish security. On the failure of the debtor to comply with the demand of the bank, the bank continues to press for payment for some time. Thereafter, verbal enquiries are made to ascertain whether the debtor concerned has any assets which the bank can follow. It is only when the bank is unable to locate any assets and the debtor refuses to offer co-operation in the matter of reduction of his indebtedness that the bank proceeds to write off the debts.

In the above circumstances, the demand of Income-tax Officers for the production of documentary evidence as regards the recoverability of the debt or rejection of claims on the ground that they are premature or that they became bad in previous year is hardly justifiable. The result is that while under the Indian Companies Act or under the Banking Companies Act, banks are required to write off or provide for all doubtful or bad debts, the Income-tax Act penalises the banks for doing so. In the opinion of the Committee this anomaly should be removed and the Income-tax Act should allow full relief to banks in respect of all bad and doubtful debts actually written off or in respect of which provision is made in the books of the bank. Banks being public limited companies, their books are audited by registered accountants and auditors and their officers appointed by the Board. Therefore, there is hardly any justification for placing public banks in the same category as private money-lenders. The Central Board of Revenue must be aware that even after writing off the debts as a precautionary measure, the banks continue in their attempts to realise as much of their debts as possible by constant persuasion or other methods. Whatever amounts are realised in subsequent years are taken into account as income and, therefore, the Income-tax Department does not stand to lose by allowing any premature writing off of debts.

ANNEX ii - CIRCULAR DATED 22-3-1950 REFERRED TO IN clarification

Bad debts of banks - With reference to the correspondence ending with your Letter No. 176, dated 13-3-1950*, I am directed to say that in actual practice Income-tax Officers do not go into the details of all the items of bad debts claimed by a bank. What they do is to select a few important items and call for evidence regarding the same only. For obvious reasons they cannot accept the audit certificates in all cases without satisfying themselves wherever it is considered necessary. What has been stated in para 206 of Investigation Commissions Report on the subject of auditors certificates is equally applicable to the certificates issued by directors.

Circular : No. 27(19)-IT/49, dated 22-3-1950.

*letter DATED 13-3-1950 REFERRED TO IN ANNEX ii

In continuation of our Letter No. 79, dated 7-2-1950, in reply to your Letter No. 27(19) IT/49, dated 19-1-1950, we beg to state that we have now secured a copy of para 206 of the Report of the Income-tax Investigation Commission and perusal thereof shows that it refers to auditors of accounts and to certificates granted by them. In our letters, however, we have not referred to auditors and any action by them. We have referred to a certificate from the board of directors of the banking company concerned and that is, of course, a different matter.

letter DATED 7-2-1950 REFERRED TO IN ABOVE letter

I am directed to thank you for your kind reply No. 27(19)-IT/49, dated 19-1-1950. Our association has gone through it very carefully and has requested me to point out that my letter No. 670 of 20-10-1949 last was written with the sole object of requesting the Honble Central Board of Revenue to issue instructions so that the time of the Income-tax Officers as well as of public banking companies in calling for elaborate details as regards each and every irrecoverable loan written off and claimed as a deduction from taxable income under section 10(2)(xi) of the 1922 Act may not be wasted. As your aforesaid reply does not refer to this point, I invite your kind attention to the matter once again. The point for consideration is that public banking companies have a working capital running into crores of rupees and a small part of the loans has often to be written off as irrecoverable. As explained in my letter on 20-10-1949, not a rupee is ever written off without taking all possible steps to recover it and no useful purpose is served by calling for elaborate details each year as regards each loan written off. The banks themselves have to spend a good deal of their time in working out the said details and the Income-tax Officers are also obliged to do the same if they have properly to go through the voluminous details supplied. With the assessment work in heavy arrears, you will agree that such use of public time could advantageously be avoided. The assessment can also be substantially expedited if time is spent only on enquiries likely to yield good results and not on fruitless enquiries such as going through details of loans written off, especially as a public company governed by the Banking Companies Act cannot write off loans, unless they are really irrecoverable. As pointed out in our last letter under the Banking Companies Act, banking companies are required to fulfil a number of additional requirements as regards preparation of accounts and balance sheets, in which elaborate details as regards loans advanced are to be shown under as many as nine categories. As a further safeguard for revenue, our association suggested that a certificate from the board of directors certifying that the loans written off were really found to be irrecoverable should be supplied to the income-tax department and our object in writing the last as well as this letter is to request the Board to issue instructions to Income-tax Officers to accept the said certificate as sufficient proof, thus saving a good deal of their valuable time as well as that of the bank concerned. As rightly observed in your reply, no serious disputes between a public bank and the Income-tax Officers has so far arisen in the matter of bad debts. This is so because such banks never write off a loan unless it is really irrecoverable and the very fact that no disputes have arisen shows that no useful purpose will be served by requiring elaborate details by way of proofs for what is beyond dispute. In the circumstances, my Association hopes that your Board will kindly consider the suggestion made in the interest of Government revenue.

2. As regards your reference to para 206 of the Income-tax Investigation Commissions Report, I have to state that this Association is not supplied with a copy of that report. I have, therefore, to request you to kindly send me a copy of the said para.