INCOME TAX

Deduction in respect of provision for bad and doubtful debts made by banks

INSTRUCTION NO. 5154/1993

 Dated: March 5, 1993

Section(s) Referred: 36(1)(vii) ,36(1)(viia)

Statute: Income - Tax Act, 1961

Section 36(1)(viia) of the Income-tax Act provides for a deduction, in respect of any provision for bad and doubtful debts made by banks, of an amount not exceeding 5% of the total income and an amount not exceeding 2% of the aggregate average advances made by the rural branches of such banks computed in the prescribed manner. Prior to 1-4-1987, the amount of admissible deduction was an amount not exceeding 10% of the total income or an amount not exceeding 2% of the aggregate average advances made by the rural branches, whichever was higher. Further, the proviso u/s.36(1)(vii) states that in the case of such banks, the amount of deduction relating to write-off of bad debts shall be limited to the amount by which such bad debts exceed the credit balance in the provision for bad and doubtful debts account already allowed as deduction under clause (viia).

2. It has been brought to the notice of the Board that some banks have taken the stand that the bad debts relating to the urban branches will not be hit by the proviso to Section 36(1)(vii) as, according to them, it is only the bad debts relating to the rural branches that will have to be set off against the provision created and allowed u/s.36(1)(viia). In other words, their argument is that the provision for bad and doubtful debts account referred to in Section 36(1)(viia) relates only to the rural branches and hence the bad debts of urban branches need not be set off against the same.

3. This view is not correct. Section 36(1)(viia) merely taken into account the quantum of the aggregate average advances of the rural branches for the purposes of quantifying the permissible deduction for the provision made and does not say that the provision itself shall relate only to the debts of rural branches. Thus, the actual bad-debts, whether relating to the urban or rural branches, should be first set off against the provision already allowed as deduction u/s.36(1)(viia) and only the excess, if any, should be permitted to be deducted u/s.36(1)(vii). The assessments already completed should be reviewed and action u/s.147/263 should be taken in appropriate cases.

4. Contents of this letter may be brought to the notice of all the officers working in your region.

F. No. 204/32/92-ITA.II